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SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



FORM 10-Q



(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------



For the quarterly period ended June 30, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------



For the transition period from
 to



ARMSTRONG HOLDINGS, INC.

(Exact name
of registrant as specified in its charter)



|                                                               |  |                        |  |                                     
|-------------------------------------------------------------- |  | ---------------------- |  | ------------------------------------
|Pennsylvania                                                   |  | 000-50408              |  | 23-3033414                          
|(State or other jurisdiction of incorporation or organization) |  | Commission file number |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|P. O. Box 3001, Lancaster, Pennsylvania  |  | 17604     
|(Address of principal executive offices) |  | (Zip Code)



Registrants
telephone number, including area code (717) 397-0611



ARMSTRONG WORLD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                        |  |                                     
|-------------------------------------------------------------- |  | ---------------------- |  | ------------------------------------
|Pennsylvania                                                   |  | 1-2116                 |  | 23-0366390                          
|(State or other jurisdiction of incorporation or organization) |  | Commission file number |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|P. O. Box 3001, Lancaster, Pennsylvania  |  | 17604     
|(Address of principal executive offices) |  | (Zip Code)



Registrants
telephone number, including area code (717) 397-0611



Armstrong World
Industries, Inc. meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore participating in the filing of this form in the reduced disclosure format permitted by such Instructions.



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act).



Yes ̈No x



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.



Yes x    No ̈



Number of shares of Armstrong Holdings, Inc.s common stock outstanding as of July 19,
2004 - 40,668,892.



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TABLE OF CONTENTS



|                               |  |                                                                                       |  |        
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | -------
|SECTION                        |  | PAGES                                                                                
|                               | 
|Cautionary Factors             |  | 3  5                                                                                
|                               | 
|PART I  FINANCIAL INFORMATION |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Condensed Consolidated Financial Statements                                           |  |        
|                               |  | Armstrong Holdings, Inc., and Subsidiaries                                            |  | 6  31 
|                               |  | Independent Registered Public Accounting Firm Review Report                           |  | 32     
|                               |  | Armstrong World Industries, Inc., and Subsidiaries                                    |  | 33  58
|                               |  |                                                                                      
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 59  74
|                               |  |                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 75     
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 75     
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 76     
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                      |  | 77  82
|                               | 
|Signatures                     |  | 83                                                                                   



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Cautionary Factors That May Affect Future Results



This report and other written reports and oral statements made from time to time by the company may contain cautionary or forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.



These statements can be identified by the use of words such as anticipate,
estimate, expect, project, intend, plan, believe, and other words of similar meaning. In particular, these include statements relating to intentions, beliefs or current
expectations concerning, among other things, future performance, results of operations, the outcome of contingencies such as legal proceedings, and financial conditions. Forward-looking statements give current expectations or forecasts of future
events. They do not relate strictly to historical or current facts.



Any or all
of the forward-looking statements made in this report and in any other public statements may turn out to be incorrect. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. We caution you that actual future results of operations may vary materially from forward-looking statements. Any forward-looking statements made in this report speak only as of the date of such
statement. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. However, you should consult any further
disclosures we make on related subjects in Forms 10-Q, 8-K, 10-K or other reports filed with the Securities and Exchange Commission.



It is not possible to predict or identify all factors that could potentially cause actual results to differ materially from expected and historical results. Some such
factors are:



Chapter 11



| |  | Factors relating to Armstrong World Industries, Inc.s (AWI) Chapter 11 Filing, such as: the possible disruption of relationships with creditors, customers,
suppliers and employees; the ultimate size of AWIs asbestos-related and other liabilities; the ability to confirm and implement a plan of reorganization; the availability of financing and refinancing for both AWI and its subsidiaries that are
not parties to its Chapter 11 Filing; legislation that might affect AWIs liabilities; and AWIs ability to comply with covenants in its debtor-in-possession credit facility (the DIP Facility).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Factors relating to AWIs emergence from bankruptcy, such as emergence-related costs and AWIs debt service costs for debt to be issued pursuant to the plan of
reorganization. Debt service costs will affect net income and cash flow.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Covenants in the agreements governing our anticipated, emergence-related debt may impose restrictions that limit operating and financial flexibility.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



Business Environment



| |  | Our business is cyclical in nature and is affected by the same economic factors that affect the residential, office, commercial and institutional renovation and construction
industries in general, such as the availability of credit, consumer confidence, changes in interest rates, governmental budgets and general economic conditions. Despite our efforts to foresee and plan for the effects of changes in these
circumstances, we cannot predict their impact with certainty. For example, economic weakness can lead customers to delay or cancel construction plans or could lead to further industry overcapacity. For more information on these matters, see the
discussion of Market Risk in Item 7A of our 2003 Form 10-K.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | The major markets for our products, particularly in the renovation and construction industries, are highly competitive. Business combinations among our competitors or suppliers
could affect our competitive position in any of our business units. Competition from foreign competitors who have lower cost structures than we have is a threat in the flooring business. Similarly, combinations or alliances among our major customers
could increase their purchasing power in dealing with us. If we should enter into one or more business combinations, our business, finances and capital structure could be affected.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The level of success of our new product introductions, as well as new patents, and those of our competitors will impact our competitive position.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The extent to which we successfully achieve integration of and synergies from acquisitions as well as the impact of divestitures, plant closings, including the ability to derive
cost savings, and other unusual items that may result from evolving business strategies and organizational restructuring will impact our results of operations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Changes in the stock and bond markets could adversely affect the valuation of assets and projected benefit obligations in the related accounting of, and the funding requirements
for, our pension plans.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sales Environment



| |  | We have several key customers and the loss of one of these customers could affect our financial performance. Although builders, dealers and other retailers represent other channels
of distribution for our products, the loss of a significant portion of sales from a major customer would have a material adverse impact on our results of operations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Business decisions made by our major customers and business conditions that affect our major customers and distribution networks may adversely affect our business.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increased retail trade consolidation, especially in markets such as the United States, could make us more dependent upon key retailers whose relative bargaining strength may
increase.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We are affected by changes in the policies and marketing strategies of our retail trade customers, such as inventory shifts or fluctuations, limitations on access to shelf space and
other conditions. Many of our customers, particularly major home center retailers, have engaged with us in continuous efforts to reduce their inventory levels and improve delivery fulfillment.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Profitability can be affected by changes over time in consumer preferences for one type of product versus another. This may create a shift in demand from products with higher
margins to those with lower margins or to products we do not sell.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We may be unable to increase prices to our customers when our costs increase.
| | - | -----------------------------------------------------------------------------



International



| |  | We face political, social and economic risks related to our international operations which can negatively affect our business, operating results, profitability and financial
condition. The risk of war and terrorism may adversely affect the economy and the demand for our products.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Various worldwide economic and political factors, such as changes in the competitive structures of the markets, credit risks in emerging markets, variations in residential and
commercial construction rates, and economic growth rates in various areas of the world in which we do business could affect the end-use markets for our products.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Profitability can be affected by margin erosion to the extent that sales shift to developing markets with lower profitability.
| | - | ------------------------------------------------------------------------------------------------------------------------------



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| |  | Changes in intellectual property legal protections and remedies, trade regulations, tariff classifications or duty rates, and procedures and actions affecting production, pricing
and marketing of products, intergovernmental disputes, possible nationalization and unstable governments and legal systems could impact our business.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Fluctuations in exchange rates can significantly affect our reported results from one period to the next. Tax inefficiencies and currency exchange controls in repatriating cash flow
from non-U.S. subsidiaries could adversely affect us.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Raw Materials and Sourced Products



| |  | The availability of raw materials, energy, water and sourced products due to changes in conditions that impact our suppliers, including environmental conditions, laws and
regulations, litigation involving our suppliers, transportation disruptions, force majeure events and/or business decisions made by our suppliers may have an adverse impact on our results of operations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We purchase a significant amount of certain raw materials, such as lumber, veneers, PVC resin, plasticizers, mineral fibers and natural gas. Prices of these raw materials, as well
as transportation costs, can change dramatically and can have a significant adverse impact on our manufacturing costs.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Labor Contracts



| |  | A significant portion of our employees in production are represented under labor contracts, with a variety of unions both domestic and international, which are generally multi-year
in nature and expire at varying dates. Resolution of expiring contracts can never be assured and work stoppages are possible at plants with expired contacts. Should a work stoppage occur, it could have a significant effect to the results of
operations, at least during the period of the event.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Legal



| |  | Claims of undetermined merit and amount have been asserted against us for various legal matters, including asbestos-related litigation and claims. We could face potential product
liability or warranty claims relating to products we manufacture or distribute. For more information on these matters, see the discussion of Legal Proceedings in Part II, Item 1 in this report.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We are subject to a wide variety of increasingly complex and stringent federal, state and local laws and regulations. Changes in laws and regulations, including accounting
standards, taxation requirements, and environmental and safety regulations, that affect our business could lead to significant, unforeseen expenditures.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART I  FINANCIAL INFORMATION



Item 1.     Financial Statements



Armstrong Holdings, Inc., and Subsidiaries

Condensed Consolidated Statements of Earnings

(amounts in millions, except per share amounts)

Unaudited



|                                                                                 |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                 |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                                                                 |  | 2004                        |       |   | 2003                      |   |       | 2004 |  |   | 2003    |  
|Net sales                                                                        |  | $                           | 903.5 |   |                           | $ | 826.9 |      |  | $ | 1,748.5 |   |  | $ | 1,601.8 |  
|Cost of goods sold                                                               |  |                             | 687.1 |   |                           |   | 646.5 |      |  |   | 1,347.5 |   |  |   | 1,254.9 |  
|                                                                                 |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  
|Gross profit                                                                     |  |                             | 216.4 |   |                           |   | 180.4 |      |  |   | 401.0   |   |  |   | 346.9   |  
|Selling, general and administrative expenses                                     |  |                             | 162.3 |   |                           |   | 146.0 |      |  |   | 309.9   |   |  |   | 303.3   |  
|Charge for asbestos liability, net                                               |  |                             |      |   |                           |   | 73.0  |      |  |   |        |   |  |   | 73.0    |  
|Goodwill impairment                                                              |  |                             | 60.0  |   |                           |   |      |      |  |   | 60.0    |   |  |   |        |  
|Restructuring and reorganization charges, net                                    |  |                             | 1.1   |   |                           |   | 0.9   |      |  |   | 3.1     |   |  |   | 4.1     |  
|Equity (earnings) from affiliates, net                                           |  |                             | (10.6 | ) |                           |   | (6.1  | )    |  |   | (17.2   | ) |  |   | (11.4   | )
|                                                                                 |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  
|Operating income/(loss)                                                          |  |                             | 3.6   |   |                           |   | (33.4 | )    |  |   | 45.2    |   |  |   | (22.1   | )
|Interest expense (unrecorded contractual interest of $21.7, $25.0, $43.4, $49.8) |  |                             | 2.2   |   |                           |   | 2.6   |      |  |   | 4.4     |   |  |   | 5.4     |  
|Other non-operating expense                                                      |  |                             | 1.6   |   |                           |   | 1.2   |      |  |   | 3.5     |   |  |   | 2.5     |  
|Other non-operating (income)                                                     |  |                             | (1.1  | ) |                           |   | (0.9  | )    |  |   | (2.3    | ) |  |   | (1.7    | )
|Chapter 11 reorganization costs, net                                             |  |                             | 1.8   |   |                           |   | 5.9   |      |  |   | 4.3     |   |  |   | 9.9     |  
|                                                                                 |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  
|Earnings/(loss) before income taxes                                              |  |                             | (0.9  | ) |                           |   | (42.2 | )    |  |   | 35.3    |   |  |   | (38.2   | )
|Income tax expense/(benefit)                                                     |  |                             | 13.6  |   |                           |   | (7.9  | )    |  |   | 30.2    |   |  |   | (5.8    | )
|                                                                                 |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  
|Net earnings/(loss)                                                              |  | $                           | (14.5 | ) |                           | $ | (34.3 | )    |  | $ | 5.1     |   |  | $ | (32.4   | )
|                                                                                 |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  
|Net earnings/(loss) per share of common stock:                                   |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  
|Basic                                                                            |  | $                           | (0.36 | ) |                           | $ | (0.85 | )    |  | $ | 0.13    |   |  | $ | (0.80   | )
|Diluted                                                                          |  | $                           | (0.36 | ) |                           | $ | (0.85 | )    |  | $ | 0.13    |   |  | $ | (0.80   | )
|Average number of common shares outstanding:                                     |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  
|Basic                                                                            |  |                             | 40.5  |   |                           |   | 40.5  |      |  |   | 40.5    |   |  |   | 40.5    |  
|Diluted                                                                          |  |                             | 40.7  |   |                           |   | 40.7  |      |  |   | 40.7    |   |  |   | 40.7    |  



See
accompanying notes to condensed consolidated financial statements beginning on page 10.



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Armstrong Holdings, Inc., and Subsidiaries

Condensed Consolidated Balance Sheets

(amounts in millions, except share data)



|                                                                                                                     |  |                        |          |   |                   |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                     |  | UnauditedJune 30, 2004 |          |   | December 31, 2003 |  
|Assets                                                                                                               |  |                        |          |   |                   |   |          |  
|Current Assets:                                                                                                      |  |                        |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                            |  | $                      | 494.3    |   |                   | $ | 484.3    |  
|Accounts and notes receivable, net                                                                                   |  |                        | 381.2    |   |                   |   | 315.4    |  
|Inventories, net                                                                                                     |  |                        | 475.9    |   |                   |   | 454.4    |  
|Deferred income taxes                                                                                                |  |                        | 19.1     |   |                   |   | 19.2     |  
|Other current assets                                                                                                 |  |                        | 90.0     |   |                   |   | 85.5     |  
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Total current assets                                                                                                 |  |                        | 1,460.5  |   |                   |   | 1,358.8  |  
|Property, plant and equipment, less accumulated depreciation and amortization of $1,464.3 and $1,434.8, respectively |  |                        | 1,224.3  |   |                   |   | 1,267.3  |  
|Insurance receivable for asbestos-related liabilities, noncurrent                                                    |  |                        | 87.1     |   |                   |   | 95.1     |  
|Prepaid pension costs                                                                                                |  |                        | 466.1    |   |                   |   | 455.1    |  
|Investment in affiliates                                                                                             |  |                        | 66.2     |   |                   |   | 48.9     |  
|Goodwill, net                                                                                                        |  |                        | 181.0    |   |                   |   | 244.1    |  
|Other intangibles, net                                                                                               |  |                        | 76.0     |   |                   |   | 79.0     |  
|Deferred income taxes, noncurrent                                                                                    |  |                        | 989.2    |   |                   |   | 988.3    |  
|Other noncurrent assets                                                                                              |  |                        | 112.3    |   |                   |   | 111.2    |  
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Total assets                                                                                                         |  | $                      | 4,662.7  |   |                   | $ | 4,647.8  |  
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Liabilities and Shareholders Equity                                                                                 |  |                        |          |   |                   |   |          |  
|Current liabilities:                                                                                                 |  |                        |          |   |                   |   |          |  
|Short-term debt                                                                                                      |  | $                      | 17.2     |   |                   | $ | 3.9      |  
|Current installments of long-term debt                                                                               |  |                        | 7.4      |   |                   |   | 8.2      |  
|Accounts payable and accrued expenses                                                                                |  |                        | 378.4    |   |                   |   | 354.2    |  
|Income taxes                                                                                                         |  |                        | 26.3     |   |                   |   | 45.9     |  
|Deferred income taxes                                                                                                |  |                        | 3.3      |   |                   |   | 3.3      |  
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Total current liabilities                                                                                            |  |                        | 432.6    |   |                   |   | 415.5    |  
|Liabilities subject to compromise                                                                                    |  |                        | 4,862.1  |   |                   |   | 4,858.5  |  
|Long-term debt, less current installments                                                                            |  |                        | 35.5     |   |                   |   | 39.4     |  
|Postretirement and postemployment benefit liabilities                                                                |  |                        | 261.9    |   |                   |   | 262.3    |  
|Pension benefit liabilities                                                                                          |  |                        | 211.6    |   |                   |   | 216.4    |  
|Other long-term liabilities                                                                                          |  |                        | 84.6     |   |                   |   | 81.2     |  
|Deferred income taxes                                                                                                |  |                        | 95.0     |   |                   |   | 95.0     |  
|Minority interest in subsidiaries                                                                                    |  |                        | 9.9      |   |                   |   | 9.7      |  
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Total noncurrent liabilities                                                                                         |  |                        | 5,560.6  |   |                   |   | 5,562.5  |  
|Shareholders equity (deficit):                                                                                      |  |                        |          |   |                   |   |          |  
|Common stock, $1 par value per share Authorized 200 million shares; issued 51,878,910 shares                         |  |                        | 51.9     |   |                   |   | 51.9     |  
|Capital in excess of par value                                                                                       |  |                        | 167.9    |   |                   |   | 167.9    |  
|Reduction for ESOP loan guarantee                                                                                    |  |                        | (142.2   | ) |                   |   | (142.2   | )
|Accumulated deficit                                                                                                  |  |                        | (932.7   | ) |                   |   | (937.8   | )
|Accumulated other comprehensive income                                                                               |  |                        | 37.9     |   |                   |   | 43.3     |  
|Less common stock in treasury, at cost 2004 and 2003  11,210,018 shares                                             |  |                        | (513.3   | ) |                   |   | (513.3   | )
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Total shareholders (deficit)                                                                                        |  |                        | (1,330.5 | ) |                   |   | (1,330.2 | )
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Total liabilities and shareholders equity                                                                           |  | $                      | 4,662.7  |   |                   | $ | 4,647.8  |  
|                                                                                                                     |  |                        |          |   |                   |   |          |  



See
accompanying notes to condensed consolidated financial statements beginning on page 10.



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Armstrong Holdings, Inc., and Subsidiaries

Condensed Consolidated Statements of Shareholders Equity

(amounts in millions,
except per share amounts)

Unaudited



|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|---------------------------------------------- |  | ---- | -------- | - | ---- | - | ---- | - |  | - | -------- | - |  | - | ----- | -
|                                               |  | 2004 |          |   | 2003 |  
|Common stock, $1 par value:                    |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at beginning of year and June 30       |  | $    | 51.9     |   |      |   |      |   |  | $ | 51.9     |   |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Capital in excess of par value:                |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at beginning of year                   |  | $    | 167.9    |   |      |   |      |   |  | $ | 167.6    |   |  |   |       |  
|Stock issuances and other                      |  |      |         |   |      |   |      |   |  |   | 0.5      |   |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at June 30                             |  | $    | 167.9    |   |      |   |      |   |  | $ | 168.1    |   |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Reduction for ESOP loan guarantee:             |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at beginning of year and June 30       |  | $    | (142.2   | ) |      |   |      |   |  | $ | (142.2   | ) |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Retained earnings (accumulated deficit):       |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at beginning of year                   |  | $    | (937.8   | ) |      |   |      |   |  | $ | (898.5   | ) |  |   |       |  
|Net earnings/(loss) for period                 |  |      | 5.1      |   |      | $ | 5.1  |   |  |   | (32.4    | ) |  | $ | (32.4 | )
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at June 30                             |  | $    | (932.7   | ) |      |   |      |   |  | $ | (930.9   | ) |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Accumulated other comprehensive income (loss): |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at beginning of year                   |  | $    | 43.3     |   |      |   |      |   |  | $ | (12.2    | ) |  |   |       |  
|Foreign currency translation adjustments       |  |      | (6.0     | ) |      |   |      |   |  |   | 28.5     |   |  |   |       |  
|Derivative gain, net                           |  |      | 0.4      |   |      |   |      |   |  |   | 0.4      |   |  |   |       |  
|Minimum pension liability adjustments          |  |      | 0.2      |   |      |   |      |   |  |   | (1.4     | ) |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Total other comprehensive income (loss)        |  |      | (5.4     | ) |      |   | (5.4 | ) |  |   | 27.5     |   |  |   | 27.5  |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at June 30                             |  | $    | 37.9     |   |      |   |      |   |  | $ | 15.3     |   |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Comprehensive (loss)                           |  |      |          |   |      | $ | (0.3 | ) |  |   |          |   |  | $ | (4.9  | )
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Less treasury stock at cost:                   |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at beginning of year and June 30       |  | $    | (513.3   | ) |      |   |      |   |  | $ | (513.3   | ) |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Total shareholders (deficit)                  |  | $    | (1,330.5 | ) |      |   |      |   |  | $ | (1,351.1 | ) |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  



See
accompanying notes to condensed consolidated financial statements beginning on page 10.



8



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

Unaudited



|                                                                                 |  |                           |       |   |      |   |       |  
|-------------------------------------------------------------------------------- |  | ------------------------- | ----- | - | ---- | - | ----- | -
|                                                                                 |  | Six Months Ended June 30, |      
|                                                                                 |  | 2004                      |       |   | 2003 |  
|Cash flows from operating activities:                                            |  |                           |       |   |      |   |       |  
|Net earnings (loss)                                                              |  | $                         | 5.1   |   |      | $ | (32.4 | )
|Adjustments to reconcile net earnings to net cash used for operating activities: |  |                           |       |   |      |   |       |  
|Depreciation and amortization                                                    |  |                           | 70.1  |   |      |   | 70.7  |  
|Deferred income taxes                                                            |  |                           | (0.2  | ) |      |   | (25.4 | )
|Equity (earnings) from affiliates, net                                           |  |                           | (17.2 | ) |      |   | (11.4 | )
|Chapter 11 reorganization costs, net                                             |  |                           | 4.3   |   |      |   | 9.9   |  
|Chapter 11 reorganization costs payments                                         |  |                           | (10.5 | ) |      |   | (12.9 | )
|Restructuring and reorganization charges, net of reversals                       |  |                           | 3.1   |   |      |   | 4.1   |  
|Restructuring and reorganization payments                                        |  |                           | (1.6  | ) |      |   | (2.1  | )
|Goodwill impairment                                                              |  |                           | 60.0  |   |      |   |      |  
|Asbestos-related insurance recoveries                                            |  |                           | 4.5   |   |      |   | 14.0  |  
|Charge for asbestos liability, net                                               |  |                           |      |   |      |   | 73.0  |  
|Cash effect of hedging activities                                                |  |                           | 7.0   |   |      |   | (11.6 | )
|Increase (decrease) in cash from change in:                                      |  |                           |       |   |      |   |       |  
|Receivables                                                                      |  |                           | (69.2 | ) |      |   | (62.6 | )
|Inventories                                                                      |  |                           | (25.0 | ) |      |   | (28.4 | )
|Other current assets                                                             |  |                           | 3.8   |   |      |   | (2.0  | )
|Other noncurrent assets                                                          |  |                           | (14.0 | ) |      |   | (7.5  | )
|Accounts payable and accrued expenses                                            |  |                           | 35.6  |   |      |   | (23.4 | )
|Income taxes payable                                                             |  |                           | (19.5 | ) |      |   | 12.8  |  
|Other long-term liabilities                                                      |  |                           | 6.2   |   |      |   | 3.0   |  
|Other, net                                                                       |  |                           | (3.8  | ) |      |   | (0.4  | )
|                                                                                 |  |                           |       |   |      |   |       |  
|Net cash provided by (used for) operating activities                             |  |                           | 38.7  |   |      |   | (32.6 | )
|                                                                                 |  |                           |       |   |      |   |       |  
|Cash flow from investing activities:                                             |  |                           |       |   |      |   |       |  
|Purchases of property, plant and equipment and computer software                 |  |                           | (38.6 | ) |      |   | (39.6 | )
|Distributions from equity affiliates                                             |  |                           |      |   |      |   | 7.0   |  
|Proceeds from the sale of assets                                                 |  |                           | 1.2   |   |      |   | 1.8   |  
|                                                                                 |  |                           |       |   |      |   |       |  
|Net cash (used for) investing activities                                         |  |                           | (37.4 | ) |      |   | (30.8 | )
|                                                                                 |  |                           |       |   |      |   |       |  
|Cash flows from financing activities:                                            |  |                           |       |   |      |   |       |  
|Increase in short-term debt, net                                                 |  |                           | 13.5  |   |      |   | 0.4   |  
|Payments of long-term debt                                                       |  |                           | (3.6  | ) |      |   | (2.3  | )
|Other, net                                                                       |  |                           | (0.3  | ) |      |   |      |  
|                                                                                 |  |                           |       |   |      |   |       |  
|Net cash provided by (used for) financing activities                             |  |                           | 9.6   |   |      |   | (1.9  | )
|                                                                                 |  |                           |       |   |      |   |       |  
|Effect of exchange rate changes on cash and cash equivalents                     |  |                           | (0.9  | ) |      |   | 4.2   |  
|                                                                                 |  |                           |       |   |      |   |       |  
|Net increase (decrease) in cash and cash equivalents                             |  | $                         | 10.0  |   |      | $ | (61.1 | )
|Cash and cash equivalents at beginning of year                                   |  |                           | 484.3 |   |      |   | 380.0 |  
|                                                                                 |  |                           |       |   |      |   |       |  
|Cash and cash equivalents at end of period                                       |  | $                         | 494.3 |   |      | $ | 318.9 |  
|                                                                                 |  |                           |       |   |      |   |       |  



See
accompanying notes to condensed consolidated financial statements beginning on page 10.



9



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NOTE 1. BASIS OF
PRESENTATION



Armstrong World Industries, Inc. (AWI) is a
Pennsylvania corporation incorporated in 1891. Armstrong Holdings, Inc. is a Delaware corporation and the publicly held parent holding company of AWI. Armstrong Holdings, Inc.s only significant asset and operation is its indirect ownership,
through Armstrong Worldwide, Inc., of all of the capital stock of AWI. We include separate financial statements for Armstrong Holdings, Inc. and its subsidiaries and AWI and its subsidiaries in this report because both companies have public
securities that are registered under the Securities Exchange Act of 1934. The difference between the financial statements of Armstrong Holdings, Inc. and its subsidiaries and AWI and its subsidiaries is primarily due to transactions that occurred in
2000 related to the formation of Armstrong Holdings, Inc. and to employee compensation-related stock activity. However, there are no differences in the income statements presented in this report for Armstrong Holdings, Inc. and its subsidiaries and
AWI and its subsidiaries, and minimal differences in the remaining three financial statements of each entity. Due to the lack of material differences in the financial statements, when we refer in this document to Armstrong Holdings, Inc. and its
subsidiaries as AHI, Armstrong, we, us, and ourselves, we are also effectively referring to AWI and its subsidiaries. We use the term AWI when we are referring solely to
Armstrong World Industries, Inc.



The accounting policies used in preparing
these statements are the same as those used in preparing AHIs condensed consolidated financial statements for the year ended December 31, 2003, which includes the accounts of AHI and its majority-owned subsidiaries. These condensed
consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in AHIs Form 10-K for the fiscal year ended December 31, 2003. In the opinion of management, all adjustments
of a normal recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in
each quarter of the year and the possibility of changes in general economic conditions.



Operating results for the second quarter and first six months of 2004 and the corresponding periods of 2003 included in this report are unaudited. However, these condensed consolidated financial statements have been reviewed by an
independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States) for a limited review of interim financial information. Certain prior year amounts have been reclassified to
conform to the current year presentation.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



The following disclosure is provided in accordance with SFAS No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure. The following table illustrates the effect on net income and earnings per share if AHI had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-based
Compensation, to stock-based employee compensation.



|                                                                                                                                            |  |                             |       |   |                           |   |       |      |  |      |      |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | ---- | ---- |  | - | ----- | -
|                                                                                                                                            |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                                                                                                                            |  | 2004                        |       |   | 2003                      |   |       | 2004 |  | 2003 |     
|Net income/(loss), as reported                                                                                                              |  | $                           | (14.5 | ) |                           | $ | (34.3 | )    |  | $    | 5.1  |  | $ | (32.4 | )
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                                  |  |                             |      |   |                           |   |      |      |  |      |     |  |   | 0.1   |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             |      |   |                           |   | (0.1  | )    |  |      |     |  |   | (0.2  | )
|                                                                                                                                            |  |                             |       |   |                           |   |       |      |  |      |      |  |   |       |  
|Pro forma net income/(loss)                                                                                                                 |  | $                           | (14.5 | ) |                           | $ | (34.4 | )    |  | $    | 5.1  |  | $ | (32.5 | )
|                                                                                                                                            |  |                             |       |   |                           |   |       |      |  |      |      |  |   |       |  
|Earnings/(loss) per share:                                                                                                                  |  |                             |       |   |                           |   |       |      |  |      |      |  |   |       |  
|Basic  as reported                                                                                                                         |  | $                           | (0.36 | ) |                           | $ | (0.85 | )    |  | $    | 0.13 |  | $ | (0.80 | )
|Basic  pro forma                                                                                                                           |  | $                           | (0.36 | ) |                           | $ | (0.85 | )    |  | $    | 0.13 |  | $ | (0.80 | )
|Diluted  as reported                                                                                                                       |  | $                           | (0.36 | ) |                           | $ | (0.85 | )    |  | $    | 0.13 |  | $ | (0.80 | )
|Diluted  pro forma                                                                                                                         |  | $                           | (0.36 | ) |                           | $ | (0.85 | )    |  | $    | 0.13 |  | $ | (0.80 | )



NOTE 2. CHAPTER 11 REORGANIZATION



Proceedings under Chapter 11



On December 6, 2000, AWI, the
major operating subsidiary of AHI, filed a voluntary petition for relief (the Filing) under Chapter 11 of the U.S. Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (the
Bankruptcy Court) in order to use the court-supervised reorganization process to achieve a resolution of the AWIs asbestos-related liability. Also filing under Chapter 11 were two of AWIs wholly-owned subsidiaries, Nitram
Liquidators, Inc. (Nitram) and Desseaux Corporation of North America, Inc. (Desseaux). The Chapter 11 cases are being jointly administered under case number 00-4471 (the Chapter 11 Case). Shortly after its
commencement, the Chapter 11 Case was assigned to Judge Randall J. Newsome. His appointment as a visiting judge in the District of Delaware ended on December 31, 2003. On January 6, 2004, the Chapter 11 Case was reassigned to Judge Judith K.
Fitzgerald.



AHI and all of AWIs other direct and indirect subsidiaries,
including Armstrong Wood Products Inc. (formerly Triangle Pacific Corp.), WAVE (AWIs ceiling grid systems joint venture with Worthington Industries, Inc.), Armstrong Canada, and Armstrong DLW AG, were not a part of the Filing and accordingly,
except for any asbestos-related liability that also relates, directly or indirectly, to the pre-Filing activities of AWI, the liabilities, including asbestos-related liability if any, of such companies will not be resolved in AWIs Chapter 11
Case. See below under The Asbestos Personal Injury Trust and Note 12 under Asbestos-Related Litigation.



AWI is operating its business and managing its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant to the provisions of the
Bankruptcy Code, AWI is not permitted to pay any claims or obligations which arose prior to the Filing date (prepetition claims) unless specifically authorized by the Bankruptcy Court. Similarly, claimants may not enforce any claims against AWI that
arose prior to the date of the Filing unless specifically authorized by the Bankruptcy Court. In addition, as a debtor-in-possession, AWI has the right, subject to the Bankruptcy Courts approval, to assume or reject any executory contracts and
unexpired leases in existence at the date of the Filing.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Some of these have been specifically assumed and others have been specifically rejected already in the course of the Chapter 11 Case. In the plan of
reorganization which it has proposed, as described below, AWI has indicated the other executory contracts and unexpired leases that it intends to assume or reject upon consummation of the plan; any not specifically assumed under the plan will be
rejected upon consummation of the plan. Parties having claims as a result of the rejection of a contract may file claims with the Bankruptcy Court, which will be dealt with as part of the Chapter 11 Case.



Three creditors committees, one representing asbestos personal injury claimants (the
Asbestos Personal Injury Claimants Committee), one representing asbestos property damage claimants (the Asbestos Property Damage Committee), and the other representing other unsecured creditors (the Unsecured
Creditors Committee), were appointed in the Chapter 11 Case. In addition, an individual was appointed to represent the interests of future asbestos personal injury claimants (the Future Claimants Representative). In
accordance with the provisions of the Bankruptcy Code, these parties have the right to be heard on matters that come before the Bankruptcy Court in the Chapter 11 Case. Upon resolution of all asbestos property damage claims, the Asbestos Property
Damage Committee was disbanded.



Plan of
Reorganization



On November 4, 2002, AWI filed a Plan of Reorganization
with the Bankruptcy Court. During 2003, AWI filed several amendments to the plan with the Bankruptcy Court, along with various exhibits. The Fourth Amended Plan of Reorganization, with certain exhibits, was filed on May 23, 2003 and, as so amended
and as modified by modifications filed with the Bankruptcy Court on October 17, 2003 and November 10, 2003, is referred to in this report as the POR. The POR provides for AWI to continue to conduct its existing lines of business with a
reorganized capital structure under which, among other things, its existing shares of stock will be cancelled and new common shares and notes will be issued to its unsecured creditors and to a trust, as further discussed below, to be established
under the POR for the benefit of AWIs current and future asbestos-related personal injury claimants, in full satisfaction of their claims against AWI. References in this report to reorganized Armstrong are to AWI as it would be
reorganized under the POR, and its subsidiaries collectively. The POR excludes AWIs Nitram and Desseaux subsidiaries, neither of which is material to Armstrong and which are pursuing separate resolutions of their Chapter 11 cases that are
expected to result in the winding up of their affairs.



During 2003, the POR
was submitted for a vote by AWIs creditors for its approval. It was approved by each creditor class that was entitled to vote on the POR except the class of unsecured creditors. On November 17 and 18, 2003, the Bankruptcy Court held a hearing
on confirmation of the Plan and on December 19, 2003, issued proposed findings of fact and conclusions of law and a proposed order confirming the POR, notwithstanding the rejection of the POR by the class of unsecured creditors. On December 29,
2003, the Unsecured Creditors Committee filed an objection to the Bankruptcy Courts proposed findings of fact and conclusions of law and the proposed order of confirmation of the POR. This objection remains pending with the U.S. District
Court. The Bankruptcy Code requires action of the U.S. District Court, in addition to that of the Bankruptcy Court, to approve the POR. Proceedings in the U.S. District Court were stayed in late 2003, due to a controversy relating to the judge. A
new judge was assigned to the case, and proceedings are expected to resume after the judge assesses the status of the case. See Recent Developments and Next Steps in the Chapter 11 Process.



Disclosure Statement



In connection with the vote of creditors on the POR, AWI was required to prepare a
disclosure statement concerning its business and the POR, including certain projected financial information assuming an Effective Date of the POR as July 1, 2003, intended to demonstrate to the Bankruptcy Court the feasibility of the POR and
AWIs ability to continue operations upon its emergence from Chapter 11. On May 30, 2003, the Bankruptcy Court approved the disclosure statement for distribution to parties in interest in the Chapter 11 Case. The projected financial information
included in the disclosure statement was updated in certain respects by information submitted to the Bankruptcy Court in connection with the Bankruptcy Courts November 2003 hearing on confirmation of the POR. The projected financial
information was prepared for the limited purposes of consideration by the Bankruptcy Court, creditors and other parties in interest in the Chapter 11 Case of matters pertinent to the case. As indicated in the disclosure statement,



12



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



the projected financial information and various estimates of value therein provided should not be regarded as representations or warranties by AWI, AHI or
any other person. There is no assurance that any such projection or valuation will be realized. The projected financial information and estimates of value were prepared by AWI and its financial advisors and have not been audited or reviewed by
independent accountants. The projections will not be updated on an ongoing basis. At the time they were prepared, the projections reflected numerous assumptions concerning reorganized Armstrongs anticipated future performance and with respect
to prevailing and anticipated market and economic conditions, which were and remain beyond our control and which may not materialize. Projections are inherently subject to significant and numerous uncertainties and to a wide variety of significant
business, economic and competitive risks and the assumptions underlying the projections may be wrong in a material respect. Actual results may vary significantly from those contemplated by the projections.



Asbestos Personal Injury Trust



A principal feature of the POR is the creation of a trust (the Asbestos P I
Trust), pursuant to section 524(g) of the Bankruptcy Code, for the purpose of addressing AWIs personal injury (including wrongful death) asbestos-related liability. All present and future asbestos-related personal injury claims against
AWI, including contribution claims of co-defendants, arising directly or indirectly out of AWIs pre-Filing use of or other activities involving asbestos will be channeled to the Asbestos P I Trust.



In accordance with the 524(g) injunction to be issued by the District Court in
connection with the confirmation of the POR, various entities will be protected from such present and future AWI asbestos-related personal injury claims. These entities include, among others, AWI as it will be reorganized, AHI, AWIs
subsidiaries and other affiliates (as defined in the POR), and their respective officers and directors. Upon emergence from Chapter 11, AWI will not have any responsibility for these claims (including claims against AWI based solely on its ownership
of a subsidiary or other affiliate), nor will it participate in their resolution.



However, although AWIs domestic and foreign subsidiaries and other affiliates will be protected parties, asbestos-related personal injury claims against them will be channeled to the Asbestos P I Trust only to the extent such claims
directly or indirectly relate to the pre-Filing manufacturing, installation, distribution or other activities of AWI, or AWIs ownership of the subsidiaries or affiliates (as distinguished from independent activities of the subsidiaries or
affiliates). See Note 12 under Asbestos-Related Litigation.



In
addition, workers compensation claims brought against AWI or its subsidiaries or other affiliates will not be channeled to the Asbestos P I Trust and will remain subject to the workers compensation process. Workers compensation law
provides that the employer is responsible for evaluation, medical treatment and lost wages as a result of a job-related injury. Historically, workers compensation claims against AWI or its subsidiaries have not been significant in number or
amount, and AWI has continued to honor its obligations with respect to such claims during the Chapter 11 Case. Currently, AWI has four pending workers compensation claims and its UK subsidiary has four employer liability claims involving
alleged asbestos exposure.



There also is uncertainty as to proceedings, if
any, brought in certain foreign jurisdictions with respect to the effect of the 524(g) injunction in precluding the assertion in such jurisdictions of asbestos-related personal injury claims, proceedings related thereto or the enforcement of
judgments rendered in such proceedings.



Management believes neither AWI nor
its subsidiaries or other affiliates is subject to asbestos-related personal injury claims, material in amount to reorganized Armstrong, that would not be channeled to the Asbestos P I Trust.



13



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Consideration to Be Distributed under the POR (unaudited)



The Asbestos P I Trust and the holders of allowed unsecured claims will share in the
following consideration to be distributed under the POR:



| |  | AWIs Available Cash, which is defined in the POR as:
| | - | -------------------------------------------------------



| |  | Cash available on the effective date of the POR after reserving up to $100 million (as determined by AWI) to fund ongoing operations and making provisions for certain required
payments under the POR,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Any cash drawn, at AWIs sole discretion, under a credit facility to be established as provided by the POR for the purpose of funding distributions under the POR, and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Certain insurance proceeds related to environmental matters
| | - | -----------------------------------------------------------



However, proceeds received under any private offering of debt securities and/or secured term loan borrowings made, as permitted by the POR, in connection
with consummation of the POR shall be excluded from the determination of Available Cash.



| |  | Plan Notes of AWI as further described below or net cash proceeds from any private offerings of debt securities issued in lieu thereof, and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | Substantially all of the new common stock of AWI.
| | - | -------------------------------------------------



The total amount of Plan Notes will be the greater of (i) $1.125 billion less Available Cash and (ii) $775 million. However, AWI will use reasonable efforts to issue one
or more private offerings of debt securities on, or as soon as practicable after, the Effective Date. These offerings are to yield net proceeds at least equal to the amount of the Plan Notes prescribed by the Plan. If the private offerings are
successful, the Plan Notes would not be issued. If the offerings yield proceeds less than the amount of the Plan Notes prescribed by the Plan, Plan Notes equal to the difference will be issued. If only the Plan Notes are issued, reorganized
Armstrong expects to issue an aggregate amount of $775 million of Plan Notes. These Plan Notes will consist of (i) a tranche of notes with a seven-year maturity and a fixed interest rate, (ii) a tranche of notes with a ten-year maturity and a fixed
interest rate and (iii) a tranche of floating rate notes with a maturity of not less than five years, but no more than ten years, structured in a manner similar to, and as liquid as, marketable bank debt which satisfy the requirements of the POR and
are on terms and conditions that are satisfactory to AWI, the Asbestos Personal Injury Claimants Committee, and the Future Claimants Representative. To the extent Plan Notes of more than one type are issued, a pro rata share of each
tranche will be issued to the Asbestos P I Trust and the holders of unsecured claims.



The POR provides that unsecured creditors, other than convenience creditors described below, will receive their pro rata share of:



| |  | 34.43% of the new common stock of reorganized Armstrong,
| | - | --------------------------------------------------------



| |  | 34.43% of the first $1.05 billion of all the cash and Plan Notes to be distributed under the POR to unsecured creditors (other than convenience creditors) and the Asbestos P I
Trust, in the form of:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Up to $300 million of Available Cash and
| | - | ----------------------------------------



| |  | The balance in principal amount of Plan Notes or in net cash proceeds from any private offerings of debt securities made in lieu of issuing Plan Notes.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 60% of the next $50 million of Available Cash but, if such Available Cash is less than $50 million, then 60% of the balance in Plan Notes or in net cash proceeds from any private
offerings of debt securities made in lieu of issuing Plan Notes, and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 34.43% of the remaining amount of any Available Cash and any Plan Notes up to the maximum amount of Plan Notes provided to be issued under the POR, or net cash proceeds from any
private offerings of debt securities made in lieu of issuing such Plan Notes.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The remaining amount of new common stock of reorganized Armstrong, Available Cash and Plan Notes or net cash proceeds from any private offerings of debt securities made in lieu of issuing Plan Notes will be
distributed to the Asbestos P I Trust.



14



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Under the POR, unsecured creditors whose claims (other than claims on debt securities) are less than $10 thousand or
who elect to reduce their claims to $10 thousand will be treated as convenience creditors and will receive payment of 75% of their allowed claim amount in cash (which payments will reduce the amount of Available Cash).



Under the POR, the existing equity interests in AWI (including all of its outstanding shares
of common stock) will be cancelled. The POR provides for the distribution of warrants to purchase shares of reorganized Armstrong (the Warrants) to the holders of AWIs existing common stock. The terms of the Warrants are provided
in an exhibit to the POR. The Warrants:



| |  | would permit the purchase of 5% of the common stock of reorganized Armstrong on a fully diluted basis, upon exercise of all the Warrants;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | would be exercisable at any time during the seven years after the effective date of the POR; and
| | - | ------------------------------------------------------------------------------------------------



| |  | would permit the purchase of shares at an exercise price of $37.50, which is equal to 125% of the $30.00 per share equity value of reorganized Armstrong, as agreed among the
financial advisers for AWI, the Asbestos Personal Injury Claimants Committee, the Unsecured Creditors Committee, and the Future Claimants Representative, as set forth in the Bankruptcy Court-approved disclosure statement for the
POR (as further described below).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Whether any value will be
realized from the Warrants will depend on whether the market value of reorganized Armstrongs new common stock reaches a value in excess of the exercise price of the Warrants during the period that they may be exercised.



AHIs shareholders were not entitled to vote on the POR. However, AHIs
shareholders were sent the Disclosure Statement and POR. If the POR is implemented, the only value that will be available to AHI shareholders is their ratable share of the Warrants available upon the contemplated dissolution of AHI. See AHIs
Plan of Dissolution below.



Valuation of
Consideration to be Distributed under the POR (unaudited)



Based upon many
assumptions (see Disclosure Statement discussion above), to calculate the value of consideration to be distributed, AWI used $2.7 billion as the value of reorganized Armstrong. This is the mid-point of the range of estimated values of $2.4 billion
and $3.0 billion that was estimated by AWI and its financial advisors. AWIs estimated value of the consideration to be distributed under the POR to the Asbestos P I Trust, holders of allowed unsecured claims and AWIs existing common
stock, is:



| |  | New common stock at $30 a share, which is the approximate mid-point of the range of estimated values of $24.66 and $35.30 per share, assuming a distribution of 56.4 million shares
of new common stock to holders of unsecured claims and the Asbestos P I Trust;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Plan Notes in the aggregate principal amount of $775 million, that are worth their face value;
| | - | ----------------------------------------------------------------------------------------------



| |  | Available Cash of approximately $350 million that AWI expects to have; and
| | - | --------------------------------------------------------------------------



| |  | Warrants with an estimated value of between $35 million and $40 million.
| | - | ------------------------------------------------------------------------



The total value of the consideration to be distributed to the Asbestos P I Trust, other than rights under asbestos non-product liability insurance policies, has been
estimated to be approximately $1.8 billion, and the total value of consideration to be distributed to holders of allowed unsecured claims (other than convenience claims) has been estimated to be approximately $0.9 billion. Based upon the estimated
value of the POR consideration, and upon AWIs estimate that unsecured claims allowed by the Bankruptcy Court (other than convenience claims) will total approximately $1.65 billion, AWI estimated that holders of allowed unsecured claims (other
than convenience claims) will receive a recovery having a value equal to approximately 59.5% of their allowed claims.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



AHIs Plan of Dissolution, Winding Up and Distribution (Plan of
Dissolution)



In connection with the implementation of the POR, the
Warrants will be issued to AHI (or a wholly-owned subsidiary of AHI). The Board of Directors of AHI has determined that it is not practicable for AHI to continue in operation as an on-going business owning the Warrants, which will then be AHIs
only asset. Accordingly, the Board of Directors of AHI approved and recommended to AHI shareholders the Plan of Dissolution, whereby AHI will voluntarily dissolve and wind up its affairs in accordance with Pennsylvania law and, subject to completion
of AHIs winding up (including the satisfaction of any liabilities of AHI), distribute any remaining Warrants to the shareholders. At a special meeting of AHI shareholders held on January 7, 2004, the Plan of Dissolution was approved by the AHI
shareholders. The POR provides that AWI will pay the costs and expenses incurred in connection with administering AHIs Plan of Dissolution.



Recent Developments and Next Steps in the Chapter 11 Process



In order for the POR to be confirmed, the U.S. District Court must issue findings of fact and conclusions of law in support of confirmation
of the POR, enter or affirm an order confirming the POR and issue the 524(g) injunction which is part of the POR. In certain other companies asbestos-related Chapter 11 cases, motions for recusal were filed in 2003 against U.S.
District Court Judge Alfred M. Wolin, who was jointly administering with the Bankruptcy Court the asbestos-related issues in the Chapter 11 cases of five companies, including AWI. As a result of these motions, Judge Wolin stayed proceedings in all
five cases before him, including AWIs Chapter 11 Case. Judge Wolin retired from the bench effective June 30, 2004. Judge Eduardo C. Robreno was assigned to the AWI case. Judge Robreno directed that a status report be filed with him by July 28,
2004. AWI is uncertain when confirmation of the POR will be considered by the U.S. District Court.



Common Stock and Debt Securities



As a result of AWI filing the Plan of Reorganization on November 4, 2002, the New York Stock Exchange stopped trading on the Exchange of the common stock of AHI (traded
under the ticker symbol ACK) and two debt securities of AWI (traded under the ticker symbols AKK and ACK 08). AHIs common stock resumed trading in the over-the-counter (OTC) Bulletin Board under the ticker
symbol ACKHQ and one of AWIs debt securities resumed trading under the ticker symbol AKKWQ.



Bar Date for Filing Claims



The Bankruptcy Court established August 31, 2001 as the bar date for all claims against AWI except for asbestos-related personal injury claims and certain other specified
claims. A bar date is the date by which claims against AWI must be filed if the claimants wish to participate in any distribution in the Chapter 11 Case. A bar date for asbestos-related personal injury claims (other than claims for contribution,
indemnification, or subrogation) has been rendered unnecessary under the terms of the POR, which defers the filings of such claims until the Asbestos P I Trust is established to administer such claims.



Approximately 4,800 proofs of claim (including late-filed claims) totaling approximately $6.3
billion, alleging a right to payment from AWI, were filed with the Bankruptcy Court in response to the August 31, 2001 bar date. The disposition of these claims under the POR is discussed below. AWI continues the process of investigating and
resolving these claims. The Bankruptcy Court will ultimately determine the claims and related liability amounts that will be allowed as part of the Chapter 11 process if the parties cannot agree.



In its ongoing review of the filed claims, AWI to date has objected to approximately 2,100
claims totaling $2.4 billion. The Bankruptcy Court disallowed these claims with prejudice.



During the first six months of 2003, AWI settled all of the approximately 460 remaining property damage claims that alleged damages of $800 million, for approximately $9 million. Payments to claimants were made during
the third quarter of 2003 and were funded by insurance.



Approximately 1,100
proofs of claim totaling approximately $1.5 billion are pending with the Bankruptcy Court that are associated with asbestos-related personal injury litigation, including direct personal injury claims, claims by co-defendants for contribution and
indemnification, and claims relating to AWIs participation in the Center for Claims Resolution. As stated above, the bar date of August 31, 2001 did not



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



apply to asbestos-related personal injury claims other than claims for contribution, indemnification, or subrogation. The POR contemplates that all AWI
asbestos-related personal injury claims, including claims for contribution, indemnification, or subrogation, will be addressed in the future pursuant to the procedures relating to the Asbestos P I Trust developed in connection with the POR. See
further discussion regarding AWIs liability for asbestos-related matters in Note 12.



Approximately 1,200 claims totaling approximately $1.6 billion alleging a right to payment for financing, environmental, trade debt and other claims remain. For these categories of claims, AWI has previously recorded
approximately $1.6 billion in liabilities.



AWI has recorded liability amounts
for claims that can be reasonably estimated and which it does not contest or believes are probable of being allowed by the Bankruptcy Court. The final value of all the claims that will ultimately be allowed by the Bankruptcy Court is not known at
this time. However, it is likely the value of the claims ultimately allowed by the Bankruptcy Court will be different than amounts presently recorded by AWI. This difference could be material to AWIs financial position and the results of its
operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and make changes to the recorded liability if and when it is appropriate.



Financing



AWI has a $75 million debtor-in-possession credit facility that currently is limited to
issuances of letters of credit. This facility is scheduled to mature on December 8, 2004. As of June 30, 2004, AWI had approximately $37.3 million in letters of credit, which were issued pursuant to the DIP Facility. As of June 30, 2004, AWI had
$313.1 million of cash and cash equivalents, excluding cash held by its non-debtor subsidiaries. AWI believes that cash on hand and generated from operations and dividends from its subsidiaries, together with subsidiary lines of credit and the DIP
Facility, will be adequate to address its foreseeable liquidity needs. Obligations under the DIP Facility, including reimbursement of draws under the letters of credit, if any, constitute superpriority administrative expense claims in the Chapter 11
Case.



Accounting Impact



AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization
under the Bankruptcy Code (SOP 90-7) provides financial reporting guidance for entities that are reorganizing under the Bankruptcy Code. This guidance is implemented in the accompanying consolidated financial statements.



Pursuant to SOP 90-7, AWI is required to segregate pre-Filing liabilities that
are subject to compromise and report them separately on the balance sheet. See Note 5 for detail of the liabilities subject to compromise at June 30, 2004 and December 31, 2003. Liabilities that may be affected by a plan of reorganization are
recorded at the expected amount of the allowed claims, even if they may be settled for lesser amounts. Substantially all of AWIs pre-Filing debt, now in default, is recorded at face value and is classified within liabilities subject to
compromise. Obligations of AWI subsidiaries not covered by the Filing remain classified on the consolidated balance sheet based upon maturity date. AWIs estimated liability for asbestos-related personal injury claims is also recorded in
liabilities subject to compromise. See Note 12 for further discussion of AWIs asbestos liability.



Additional pre-Filing claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



SOP 90-7 also requires separate reporting of all revenues, expenses, realized gains and losses, and provision for
losses related to the Filing as Chapter 11 reorganization costs, net. Accordingly, AWI recorded the following Chapter 11 reorganization activities through June 30 of 2004 and 2003:



|                                                  |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|------------------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                  |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|                                                  |  | 2004                        |      |   | 2003                      |   |      | 2004 |  |   | 2003 |  
|Professional fees                                 |  | $                           | 2.7  |   |                           | $ | 6.9  |      |  | $ | 6.0  |   |  | $ | 12.0 |  
|Interest income, post-Filing                      |  |                             | (0.9 | ) |                           |   | (0.8 | )    |  |   | (1.7 | ) |  |   | (1.7 | )
|Reductions to pre-Filing liabilities              |  |                             |     |   |                           |   | (0.2 | )    |  |   |     |   |  |   | (0.5 | )
|Other expense directly related to bankruptcy, net |  |                             |     |   |                           |   |     |      |  |   |     |   |  |   | 0.1  |  
|                                                  |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|Total Chapter 11 reorganization costs, net        |  | $                           | 1.8  |   |                           | $ | 5.9  |      |  | $ | 4.3  |   |  | $ | 9.9  |  
|                                                  |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  



Professional fees represent legal and
financial advisory fees and expenses directly related to the Filing.



Interest
income is earned from short-term investments subsequent to the Filing.



Reductions to pre-Filing liabilities represent Bankruptcy Court approved settlements of prepetition liabilities.



As a result of the Filing, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as a debtor-in-possession, AWI may sell or
otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements.



If and when the POR is confirmed and made effective, reorganized AWIs condensed consolidated financial statements will change materially in amounts and
classifications through the implementation of the fresh start accounting rules of SOP 90-7.



Conclusion



Although the POR has been developed, implementation of the POR is subject to confirmation of the POR in accordance with the provisions of the Bankruptcy Code and
satisfaction after consummation of certain conditions, as provided by the POR. AWI is unable to predict when and if the POR will be confirmed. Therefore, the timing and terms of a resolution of the Chapter 11 Case remain uncertain.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NOTE 3. SEGMENT RESULTS



|                                  |  |                             |       |                           |   |       |  |      |         |  |   |        
|--------------------------------- |  | --------------------------- | ----- | ------------------------- | - | ----- |  | ---- | ------- |  | - | -------
|                                  |  | Three Months Ended June 30, |       | Six Months Ended June 30,
|                                  |  | 2004                        |       | 2003                      |   | 2004  |  | 2003
|Net sales to external customers   |  |                             |       |                           |   |       |  |     
|Resilient Flooring                |  | $                           | 321.9 |                           | $ | 308.3 |  | $    | 626.0   |  | $ | 595.0  
|Wood Flooring                     |  |                             | 214.1 |                           |   | 181.6 |  |      | 411.5   |  |   | 348.8  
|Textiles and Sports Flooring      |  |                             | 65.1  |                           |   | 67.1  |  |      | 127.4   |  |   | 129.1  
|Building Products                 |  |                             | 247.3 |                           |   | 216.7 |  |      | 477.3   |  |   | 423.8  
|Cabinets                          |  |                             | 55.1  |                           |   | 53.2  |  |      | 106.3   |  |   | 105.1  
|                                  |  |                             |       |                           |   |       |  |      |         |  |   |        
|Total sales to external customers |  | $                           | 903.5 |                           | $ | 826.9 |  | $    | 1,748.5 |  | $ | 1,601.8
|                                  |  |                             |       |                           |   |       |  |      |         |  |   |        



|                                           |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|------------------------------------------ |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                           |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                           |  | 2004                        |       |   | 2003                      |   |       | 2004 |  |   | 2003  |  
|Segment operating income/(loss)            |  |                             |       |   |                           |   |       |      |  |   |       |  
|Resilient Flooring                         |  | $                           | (39.5 | ) |                           | $ | 19.1  |      |  | $ | (23.4 | ) |  | $ | 36.7  |  
|Wood Flooring                              |  |                             | 21.1  |   |                           |   | 5.7   |      |  |   | 31.4  |   |  |   | 7.9   |  
|Textiles and Sports Flooring               |  |                             | (1.7  | ) |                           |   | (3.1  | )    |  |   | (3.6  | ) |  |   | (9.1  | )
|Building Products                          |  |                             | 38.4  |   |                           |   | 27.8  |      |  |   | 66.3  |   |  |   | 45.6  |  
|Cabinets                                   |  |                             | 1.5   |   |                           |   | (2.4  | )    |  |   | 2.1   |   |  |   | (6.0  | )
|All Other                                  |  |                             | 0.8   |   |                           |   | 0.5   |      |  |   | 1.3   |   |  |   | 0.9   |  
|                                           |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total segment operating income             |  |                             | 20.6  |   |                           |   | 47.6  |      |  |   | 74.1  |   |  |   | 76.0  |  
|Unallocated Corporate (expense)            |  |                             | (17.0 | ) |                           |   | (81.0 | )    |  |   | (28.9 | ) |  |   | (98.1 | )
|                                           |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total consolidated operating income/(loss) |  | $                           | 3.6   |   |                           | $ | (33.4 | )    |  | $ | 45.2  |   |  | $ | (22.1 | )
|                                           |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  



|                                |  |               |         |                   |   |        
|------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                |  | June 30, 2004 |         | December 31, 2003
|                                | 
|Segment assets                  |  |               |         |                  
|Resilient Flooring              |  | $             | 863.3   |                   | $ | 915.3  
|Wood Flooring                   |  |               | 614.2   |                   |   | 576.6  
|Textiles and Sports Flooring    |  |               | 212.3   |                   |   | 207.1  
|Building Products               |  |               | 568.4   |                   |   | 551.5  
|Cabinets                        |  |               | 100.7   |                   |   | 102.3  
|All Other                       |  |               | 20.3    |                   |   | 18.8   
|                                |  |               |         |                   |   |        
|Total segment assets            |  |               | 2,379.2 |                   |   | 2,371.6
|Assets not assigned to segments |  |               | 2,283.5 |                   |   | 2,276.2
|                                |  |               |         |                   |   |        
|Total consolidated assets       |  | $             | 4,662.7 |                   | $ | 4,647.8
|                                |  |               |         |                   |   |        



NOTE 4. INCOME TAX EXPENSE/(BENEFIT)



Tax expense of $13.6
million recorded in the second quarter represents the estimated effective tax rate for 2004 applied against quarterly pre-tax income of $59.1 million, which is the amount of income exclusive of the impact of the nontaxable $60 million goodwill
impairment. The resulting second quarter tax rate of 23% is lower than the statutory US Federal and state rate primarily because of special tax benefits recorded to reflect the overall favorable settlement of tax audits during the quarter.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NOTE 5. LIABILITIES SUBJECT TO COMPROMISE



As a result of AWIs Chapter 11 filing (see Note 2), pursuant to SOP 90-7, AWI is
required to segregate prepetition liabilities that are subject to compromise and report them separately on the balance sheet. Liabilities that may be affected by a plan of reorganization are recorded at the amount of the expected allowed claims,
even if they may be settled for lesser amounts. Substantially all of AWIs prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of AHI subsidiaries not covered by
the Filing remain classified on the condensed consolidated balance sheet based upon maturity date. AWIs asbestos liability is also recorded in liabilities subject to compromise. See Note 2 for further discussion on how the Chapter 11 process
may address AWIs liabilities subject to compromise and Note 12 for further discussion of AWIs asbestos liability.



Liabilities subject to compromise at June 30, 2004 and December 31, 2003 are as follows:



|                                                |  |              |         |                  |   |        
|----------------------------------------------- |  | ------------ | ------- | ---------------- | - | -------
|                                                |  | June 30,2004 |         | December 31,2003
|Debt (at face value)(1)                         |  | $            | 1,388.6 |                  | $ | 1,388.6
|Asbestos-related liability                      |  |              | 3,190.6 |                  |   | 3,190.6
|Prepetition trade payables                      |  |              | 58.9    |                  |   | 58.9   
|Prepetition other payables and accrued interest |  |              | 66.3    |                  |   | 62.7   
|ESOP loan guarantee                             |  |              | 157.7   |                  |   | 157.7  
|                                                |  |              |         |                  |   |        
|Total liabilities subject to compromise         |  | $            | 4,862.1 |                  | $ | 4,858.5
|                                                |  |              |         |                  |   |        



|(1) | In accordance with SOP 90-7, we did not record contractual interest expense on prepetition
debt after the Chapter 11 filing date. This unrecorded interest expense was $21.7 million and $43.4 million in the second quarter and first six months of 2004, respectively, and $25.0 million and $49.8 million in the second quarter and the first six
months of 2003, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Additional prepetition claims
(liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.



NOTE 6. INVENTORIES



|                             |  |               |       |   |                   |   |       |  
|---------------------------- |  | ------------- | ----- | - | ----------------- | - | ----- | -
|                             |  | June 30, 2004 |       |   | December 31, 2003 |  
|Finished goods               |  | $             | 338.2 |   |                   | $ | 330.7 |  
|Goods in process             |  |               | 46.2  |   |                   |   | 40.6  |  
|Raw materials and supplies   |  |               | 177.8 |   |                   |   | 165.3 |  
|Less LIFO and other reserves |  |               | (86.3 | ) |                   |   | (82.2 | )
|                             |  |               |       |   |                   |   |       |  
|Total inventories, net       |  | $             | 475.9 |   |                   | $ | 454.4 |  
|                             |  |               |       |   |                   |   |       |  



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NOTE 7. GOODWILL AND INTANGIBLE ASSETS



As of January 1, 2004, we had goodwill of approximately $244 million. Approximately $107
million of this consolidated goodwill amount was attributable to our European resilient flooring reporting unit, which comprises wholly-owned and majority-owned subsidiaries and is reported within the Resilient Flooring reporting segment. Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at least annually. Based on an assessment of financial projections incorporated in our annual strategic plan
process which was prepared in the second quarter of 2004, we recently concluded that an indication of impairment exists for the European resilient flooring goodwill. Continuing price declines and volume shortfalls related to our European resilient
flooring products are causing significant operating losses, and we have revised our projections accordingly. We calculated a preliminary estimate of the European resilient flooring reporting units fair value using discounted cash flows. Based
on this preliminary fair value calculation, we recorded a non-cash goodwill impairment loss of $60 million in the second quarter of 2004. During the second half of 2004, we will complete the valuation process for the significant assets and
liabilities of the European resilient flooring business. Any adjustment to the estimated impairment loss based on the completion of these valuations could be material to our results of operations and will be recorded during the second half of 2004.



The following table represents the changes in goodwill for the first six
months of 2004.



|                            |  |                 |       |                     |   |      |             |  |   |               |   |  |   |      
|--------------------------- |  | --------------- | ----- | ------------------- | - | ---- | ----------- |  | - | ------------- | - |  | - | -----
|                            |  | January 1, 2004 |       | Adjustments, net(1) |   |      | Impairments |  |   | June 30, 2004
|Goodwill by segment         |  |                 |       |                     |   |      |             |  |   |              
|Resilient Flooring          |  | $               | 107.1 |                     | $ | (2.8 | )           |  | $ | (60.0         | ) |  | $ | 44.3 
|Wood Flooring               |  |                 | 110.4 |                     |   |      |             |  |   |               |   |  |   | 110.4
|Building Products           |  |                 | 14.0  |                     |   | (0.3 | )           |  |   |               |   |  |   | 13.7 
|Cabinets                    |  |                 | 12.6  |                     |   |      |             |  |   |               |   |  |   | 12.6 
|                            |  |                 |       |                     |   |      |             |  |   |               |   |  |   |      
|Total consolidated goodwill |  | $               | 244.1 |                     | $ | (3.1 | )           |  | $ | (60.0         | ) |  | $ | 181.0
|                            |  |                 |       |                     |   |      |             |  |   |               |   |  |   |      



|(1) | Primarily consists of the effects of foreign exchange.
|--- | ------------------------------------------------------



The following table details amounts related to AHIs intangible assets as of June 30, 2004 and December 31, 2003.



|                                       |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|-------------------------------------- |  | ------------------- | ----- | ----------------------- | - | ------------------- |  | ----------------------- | ----- |  | - | ----
|                                       |  | June 30, 2004       |       | December 31, 2003      
|                                       |  | GrossCarryingAmount |       | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|Amortized intangible assets            |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|Computer software                      |  | $                   | 107.5 |                         | $ | 64.1                |  | $                       | 104.1 |  | $ | 57.7
|Land use rights and other              |  |                     | 4.4   |                         |   | 1.0                 |  |                         | 4.4   |  |   | 0.9 
|                                       |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|Total                                  |  | $                   | 111.9 |                         | $ | 65.1                |  | $                       | 108.5 |  | $ | 58.6
|                                       |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|Unamortized intangible assets          |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|Trademarks and brand names             |  | $                   | 29.2  |                         |   |                     |  | $                       | 29.1  |  |   |     
|                                       |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|Other intangible assets, gross         |  | $                   | 141.1 |                         |   |                     |  | $                       | 137.6 |  |   |     
|                                       |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|Aggregate Amortization Expense         |  |                     |       |                         |   |                     |  |                         |       |  |   |     
|For the six months ended June 30, 2004 |  |                     |       |                         | $ | 7.8                 |  |                         |       |  |   |     
|For the six months ended June 30, 2003 |  |                     |       |                         | $ | 7.9                 |  |                         |       |  |   |     



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NOTE 8. RESTRUCTURING AND OTHER ACTIONS



Net restructuring charges of $1.1 million recorded in the second quarter of 2004 included
charges of $1.6 million and reversals of $0.5 million. The charges of $1.6 million related to estimated severance and related costs for approximately 130 employees in the Building Products manufacturing location in Hoogezand, The Netherlands. The
closure of this facility is estimated to be complete by the first quarter of 2005, subject to positive advice from the local works council. The production will be transferred to another Building Products location in Münster, Germany and will
result in a net reduction of approximately 72 positions. The $0.5 million of reversals comprises certain severance accruals that were no longer necessary in the remaining accruals from the 2003 charges in the Textiles and Sports Flooring ($0.2
million) and Resilient Flooring ($0.3 million) segments.



Net restructuring
charges of $2.0 million recorded in the first quarter of 2004 included charges of $2.4 million and reversals of $0.4 million. Substantially all of the $2.4 million charges related to estimated severance benefits and related costs for the Building
Products manufacturing location in Hoogezand, The Netherlands described above. The $0.4 million of reversals comprised certain severance accruals that were no longer necessary in the remaining accruals from the 2003 and 2002 charges in the Textiles
and Sports Flooring ($0.2 million) and Resilient Flooring ($0.2 million) segments.



A $1.3 million restructuring charge was recorded in the second quarter of 2003. The charge related primarily to severance benefits for approximately 11 employees in the Textiles and Sports Flooring ($0.7 million) and Resilient Flooring
($0.6 million) segments, as part of the continuing restructuring plan to consolidate certain functions in the European flooring business. In addition, $0.4 million of the remaining accrual from the second quarter 2002 charge in the Resilient
Flooring segment was reversed, comprising certain severance accruals that were no longer necessary.



A $3.2 million restructuring charge was recorded in the first quarter of 2003. The charge related to severance benefits for approximately 52 employees in the Textiles and Sports Flooring ($2.3 million) and Resilient
Flooring ($0.9 million) segments, as part of the restructuring plan to consolidate certain functions in the European flooring business.



The following table summarizes activity in the reorganization and restructuring accruals for the first six months of 2004 and 2003.



|     |  |                  |      |              |   |      |         |  |           |     |  |       |      |               |  |   |     |  |   |     
|---- |  | ---------------- | ---- | ------------ | - | ---- | ------- |  | --------- | --- |  | ----- | ---- | ------------- |  | - | --- |  | - | ----
|     |  | BeginningBalance |      | CashPayments |   |      | Charges |  | Reversals |     |  | Other |      | EndingBalance
|2004 |  | $                | 10.0 |              | $ | (1.6 | )       |  | $         | 4.0 |  | $     | (0.9 | )             |  | $ | 0.1 |  | $ | 11.6
|2003 |  |                  | 9.1  |              |   | (2.1 | )       |  |           | 4.5 |  |       | (0.4 | )             |  |   | 0.4 |  |   | 11.5



The amount in other for
2004 and 2003 is primarily related to foreign currency translation.



Substantially all of the remaining balance of the restructuring accrual as of June 30, 2004 relates to a noncancelable operating lease, which extends through 2017, and severance for terminated employees with extended payouts, the majority
of which will be paid by 2005.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NOTE 9. PENSIONS



Following are the components of net periodic benefit costs:



|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|--------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                              |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                              |  | 2004                        |       |   | 2003                      |   |       | 2004 |  |   | 2003  |  
|U.S. defined-benefit plans                    |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Pension Benefits                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Service cost of benefits earned               |  | $                           | 5.8   |   |                           | $ | 5.5   |      |  | $ | 11.6  |   |  | $ | 10.9  |  
|Interest cost on projected benefit obligation |  |                             | 22.9  |   |                           |   | 23.0  |      |  |   | 45.7  |   |  |   | 45.9  |  
|Expected return on plan assets                |  |                             | (37.0 | ) |                           |   | (36.1 | )    |  |   | (73.9 | ) |  |   | (72.2 | )
|Amortization of prior service cost            |  |                             | 4.4   |   |                           |   | 4.4   |      |  |   | 8.7   |   |  |   | 8.9   |  
|Recognized net actuarial loss                 |  |                             | 0.4   |   |                           |   | 0.3   |      |  |   | 0.8   |   |  |   | 0.7   |  
|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Net periodic pension (credit)                 |  | $                           | (3.5  | ) |                           | $ | (2.9  | )    |  | $ | (7.1  | ) |  | $ | (5.8  | )
|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Retiree Health and Life Insurance Benefits    |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Service cost of benefits earned               |  | $                           | 0.6   |   |                           | $ | 0.9   |      |  | $ | 1.3   |   |  | $ | 1.7   |  
|Interest cost on projected benefit obligation |  |                             | 5.5   |   |                           |   | 6.5   |      |  |   | 11.0  |   |  |   | 13.1  |  
|Amortization of prior service benefit         |  |                             | (1.4  | ) |                           |   | (1.3  | )    |  |   | (2.8  | ) |  |   | (2.6  | )
|Recognized net actuarial loss                 |  |                             | 2.5   |   |                           |   | 3.1   |      |  |   | 4.9   |   |  |   | 6.2   |  
|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Net periodic postretirement benefit cost      |  | $                           | 7.2   |   |                           | $ | 9.2   |      |  | $ | 14.4  |   |  | $ | 18.4  |  
|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|                                              |  |                            
|                                              |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                              |  | 2004                        |       |   | 2003                      |   |       | 2004 |  |   | 2003  |  
|Non-U.S. defined-benefit plans                |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Pension Benefits                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Service cost of benefits earned               |  | $                           | 2.2   |   |                           | $ | 2.2   |      |  | $ | 4.7   |   |  | $ | 4.1   |  
|Interest cost on projected benefit obligation |  |                             | 5.2   |   |                           |   | 5.1   |      |  |   | 10.5  |   |  |   | 9.5   |  
|Expected return on plan assets                |  |                             | (3.6  | ) |                           |   | (3.4  | )    |  |   | (7.3  | ) |  |   | (6.3  | )
|Amortization of transition obligation         |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   | 0.1   |  
|Amortization of prior service cost            |  |                             |      |   |                           |   | 0.2   |      |  |   | 0.1   |   |  |   | 0.3   |  
|Recognized net actuarial loss                 |  |                             | 0.1   |   |                           |   | 0.1   |      |  |   | 0.2   |   |  |   | 0.2   |  
|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Net periodic pension cost                     |  | $                           | 3.9   |   |                           | $ | 4.2   |      |  | $ | 8.2   |   |  | $ | 7.9   |  
|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  



Medicare Act



On December 8, 2003, the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (The Act) became law in the United States. The Act provides employers currently sponsoring prescription drug programs for Medicare-eligible participants with a range of options for
coordinating with the new government-sponsored program. These options include supplementing the government program on a secondary payor basis or accepting a direct subsidy from the government to support a portion of the cost of the employers
program.



Pursuant to guidance issued in the second quarter of 2004 by the
FASB, we elected to begin recording the effect of the Act in the second quarter. The Act affects both operating income and balance sheet liabilities over time. Since the Act is effective retroactive to January 1, 2004 and the total year benefit is
expected to be $7 million, operating income for the six months ended June 30, 2004 benefited by $3.5 million. The $3.5 million benefit was evenly apportioned between the first and second quarters and was recorded in cost of goods sold ($1.9 million)
and selling, general and administrative expenses (SG&A)($1.6 million). The remaining amount of the $7 million annual benefit will be recorded in the third and fourth quarters. The reduction in the accumulated postretirement benefit
obligation related to the Medicare benefit is expected to be $52.4 million.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



NOTE 10. PRODUCT WARRANTIES



We provide direct customer and end-user warranties for our products. These warranties cover
manufacturing defects that would prevent the product from performing in line with its intended and marketed use. Generally, the terms of these warranties range up to 25 years and provide for the repair or replacement of the defective product. We
collect and analyze warranty claims data with a focus on the historical amount of claims, the products involved, the amount of time between the warranty claims and their respective sales and the amount of current sales. The following table
illustrates the activity for product warranties for the first six months of 2004 and 2003:



|                                        |  |      |       |   |      |   |       |  
|--------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                        |  | 2004 |       |   | 2003 |  
|Balance at January 1                    |  | $    | 25.5  |   |      | $ | 22.3  |  
|Reductions for payments                 |  |      | (18.9 | ) |      |   | (20.9 | )
|Current year warranty accruals          |  |      | 18.7  |   |      |   | 21.7  |  
|Preexisting warranty accrual changes    |  |      | (0.6  | ) |      |   | (0.1  | )
|Effects of foreign exchange translation |  |      | (0.2  | ) |      |   | 0.7   |  
|                                        |  |      |       |   |      |   |       |  
|Balance at June 30                      |  | $    | 24.5  |   |      | $ | 23.7  |  
|                                        |  |      |       |   |      |   |       |  



NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION



|                       |  |                          |      |      |   |     
|---------------------- |  | ------------------------ | ---- | ---- | - | ----
|                       |  | Six MonthsEnded June 30,
|                       |  | 2004                     |      | 2003
|Interest paid          |  | $                        | 1.3  |      | $ | 1.7 
|Income taxes paid, net |  | $                        | 49.4 |      | $ | 10.6



The increase in income taxes paid
related primarily to estimated federal tax payments made in the second quarter of 2004.



NOTE 12. LITIGATION AND RELATED MATTERS



ASBESTOS-RELATED LITIGATION



Prior to December 6, 2000, AWI, the major operating subsidiary of AHI, had been named as a defendant in personal injury cases and property damage cases related to
asbestos-containing products. On December 6, 2000, AWI filed a voluntary petition for relief (the Filing) under Chapter 11 of the U.S. Bankruptcy Code to use the court-supervised reorganization process to achieve a resolution of
AWIs asbestos-related liability.



Two of AWIs domestic subsidiaries
also commenced Chapter 11 proceedings at the time of the Filing. AHI and all of AWIs other direct and indirect subsidiaries, including Armstrong Wood Products Inc. (formerly Triangle Pacific Corp.), WAVE (Armstrongs ceiling grid systems
joint venture with Worthington Industries, Inc.), Armstrong Canada and Armstrong DLW AG were not a part of the Filing and accordingly the liabilities, including asbestos-related liability if any, of such companies arising out of their own activities
will not be resolved in AWIs Chapter 11 Case except for any asbestos-related liability that also relates, directly or indirectly, to the pre-Filing activities of AWI.



Asbestos-Related Personal Injury Claims

Prior to the Filing, AWI was a member of the Center for Claims Resolution (the CCR), which handled the defense and settlement of asbestos-related personal injury claims on behalf of its members. The CCR pursued broad-based
settlements of asbestos-related personal injury claims under the Strategic Settlement Program (SSP) and had reached agreements with law firms that covered approximately 130,000 claims that named AWI as a defendant.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Due to the Filing, holders of asbestos-related personal injury claims are stayed from continuing to prosecute pending
litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments to the CCR with respect to asbestos-related personal injury claims, including payments pursuant to the outstanding SSP agreements. A creditors
committee representing the interests of asbestos-related personal injury claimants and an individual representing the interests of future claimants have been appointed in the Chapter 11 Case. AWIs present and future asbestos-related liability
will be addressed in its Chapter 11 Case. See Note 2 regarding AWIs Chapter 11 proceeding.



During 2003, AWI and the other parties in its Chapter 11 Case reached agreement on a plan of reorganization that addresses how all of AWIs pre-Filing liabilities are to be settled. Several amendments to the plan
of reorganization were filed, culminating in the Fourth Amended Plan of Reorganization filed with the Bankruptcy Court on May 23, 2003, which was modified by modifications filed with the Bankruptcy Court on October 17, 2003 and November 10, 2003,
and is referred to in this report as the POR. A principal feature of the POR is the creation of a trust (the Asbestos P I Trust), pursuant to section 524(g) of the Bankruptcy Code, for the purpose of addressing AWIs
personal injury (including wrongful death) asbestos-related liability. Pursuant to the POR, all present and future asbestos-related personal injury claims against AWI, including contribution claims of co-defendants, arising directly or indirectly
out of AWIs pre-Filing use of or other activities involving asbestos will be channeled to the Asbestos P I Trust. In accordance with the 524(g) injunction to be issued by the District Court in connection with the confirmation of the POR,
various entities will be protected from such present and future asbestos-related personal injury claims. These entities include, among others, AWI as it will be reorganized, AHI, AWIs subsidiaries and other affiliates (as defined in the POR),
and their respective officers and directors. Upon emergence from Chapter 11, AWI will not have any responsibility for these claims (including claims against AWI based solely on its ownership of a subsidiary or other affiliate), nor will it
participate in their resolution.



However, although AWIs domestic and
foreign subsidiaries and other affiliates will be protected parties, asbestos-related personal injury claims against them will be channeled to the Asbestos P I Trust only to the extent such claims directly or indirectly relate to the manufacturing,
installation, distribution or other activities of AWI or are based solely on AWIs ownership of the subsidiaries or other affiliates (as distinguished from independent activities of the subsidiaries or affiliates). Currently, three
asbestos-related personal injury litigations against subsidiaries of AWI allegedly arising out of such independent activities are pending.



These claims will not be channeled to the Asbestos P I Trust under the POR inasmuch as they do not involve activities of AWI. The cases have multiple defendants. The
subsidiaries deny liability and are aggressively defending the matters. AWI has not recorded any liability for these matters. Management does not expect that any sum that may have to be paid in connection with these matters will be material to
Armstrong.



In addition, workers compensation claims brought against AWI
or its subsidiaries or other affiliates will not be channeled to the Asbestos P I Trust and will remain subject to the workers compensation process. Historically, workers compensation claims against AWI and its subsidiaries have not been
significant in number or amount and AWI has continued to honor its obligations with respect to such claims during the Chapter 11 Case. Workers compensation law provides that the employer is responsible for evaluation, medical treatment and
lost wages as a result of a job-related injury. Currently, AWI has only four pending workers compensation claims and its UK subsidiary has four employer liability claims involving alleged asbestos exposure.



There also is uncertainty as to proceedings, if any, brought in certain foreign jurisdictions
with respect to the effect of the 524(g) injunction in precluding the assertion in such jurisdictions of asbestos-related personal injury claims, proceedings related thereto or the enforcement of judgments rendered in such proceedings.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Management believes that neither AWI nor any of its subsidiaries or other affiliates is subject to any
asbestos-related personal injury claims that would not be channeled to the Asbestos P I Trust and that are of a magnitude that, individually or collectively, would be material to reorganized Armstrong.



Before the POR may be implemented, it must be confirmed by order of the Bankruptcy Court and
the U.S. District Court. In addition, consummation of the POR is subject to the satisfaction after confirmation of certain conditions, as provided by the POR. See Note 2 for discussion of recent developments and the next steps in AWIs Chapter
11 process. AWI is unable to predict when and if the POR will be confirmed and implemented. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded
asbestos-related liability are possible and could be material to AWIs financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and
make changes to the recorded liability if and when it is appropriate.



Insurance Recovery Proceedings



A
substantial portion of AWIs primary and remaining excess insurance asset is nonproducts (general liability) insurance for personal injury claims. AWI has entered into settlements with a number of the carriers resolving its coverage issues.
However, an alternative dispute resolution (ADR) procedure was commenced against certain carriers to determine the percentage of resolved and unresolved claims that are nonproducts claims, to establish the entitlement to such coverage
and to determine whether and how much reinstatement of prematurely exhausted products hazard insurance is warranted. The nonproducts coverage potentially available is substantial and includes defense costs in addition to limits.



During 1999, AWI received preliminary decisions in the initial phases of the trial proceeding
of the ADR, which were generally favorable to AWI on a number of issues related to insurance coverage. However, during the first quarter of 2001, a new trial judge was selected for the ADR. The new trial judge conducted hearings in 2001 and
determined not to rehear matters decided by the previous judge. In the first quarter of 2002, the trial judge concluded the ADR trial proceeding with findings in favor of AWI on substantially all key issues. Liberty Mutual, the only insurer that is
still a party to the ADR, appealed that final judgment. Appellate argument was held on March 11, 2003. On July 30, 2003, the appellate arbitrators ruled that AWIs claims against certain Liberty Mutual policies were barred by the statute of
limitations. The ruling did not address the merits of any of the other issues Liberty Mutual raised in its appeal. Based on that unfavorable ruling, AWI concluded that insurance assets of $73 million were no longer probable of recovery. AWI was also
ordered to reimburse Liberty Mutual for certain costs and administration fees that Liberty Mutual incurred during the ADR. The amount of these costs and fees is in dispute and AWI is currently unable to estimate the amount. Based upon an AWI
request, the appellate panel held a rehearing on November 21, 2003. In January 2004, the appellate panel upheld its initial ruling. On February 4, 2004, AWI filed a motion in the U.S. District Court for the Eastern District of Pennsylvania to vacate
the rulings of the appellate panel.



In July 2002, AWI filed a lawsuit against
Liberty Mutual in the U.S. District Court for the Eastern District of Pennsylvania seeking, among other things, a declaratory judgment with respect to certain policy issues not subject to binding ADR. The U.S. District Court has not yet set a
schedule to hear this matter.



On June 13, 2003, the New Hampshire Insurance
Department placed The Home Insurance Company (Home) under an order of liquidation. Less than $10 million of AWIs recorded insurance asset is based on policies with Home, which management believes is probable of recovery. AWI filed
a proof of claim against Home during June 2004. It is uncertain when AWI will receive proceeds from Home under these insurance policies.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Insurance Asset



An insurance asset in respect of asbestos claims in the amount of $98.6 million was recorded
as of June 30, 2004 compared to $103.1 million recorded as of December 31, 2003. The total amount recorded reflects AWIs belief that insurance proceeds will be recovered in this amount, based upon AWIs success in insurance recoveries,
settlement agreements that provide such coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. Such insurance, in our opinion, is either available through settlement or probable of recovery through negotiation or
litigation. Depending on further progress of the ADR, activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, the final determination of coverage shared with ACandS (the former AWI
insulation contracting subsidiary that was sold in August 1969 and which filed for relief under Chapter 11 of the Bankruptcy Code in September 2002) and the financial condition of the insurers, AWI may revise its estimate of probable insurance
recoveries. Approximately $79 million of the $98.6 million asset is determined from agreed coverage in place. Of the $98.6 million, $11.5 million has been recorded as a current asset as of June 30, 2004 reflecting managements estimate of the
minimum insurance payments to be received in the next 12 months.



Many
uncertainties remain in the insurance recovery process, therefore, AWI did not increase the estimated insurance recovery asset in the second quarter of 2004. During the second quarter of 2003, $9 million of an insurance asset was recorded for
asbestos property damage claims based on agreements reached during the first half of 2003.



Cash Flow Impact



As a result of the Chapter 11 Filing, AWI has not made any payments for asbestos-related personal injury claims since the fourth quarter of 2000. AWI received
asbestos-related insurance recoveries of $4.5 million and $14.0 million, respectively, during the first six months of 2004 and 2003. During the pendency of the Chapter 11 Case, AWI does not expect to make any further cash payments for
asbestos-related claims, but AWI expects to continue to receive insurance proceeds under the terms of various settlement agreements. Management estimates that the timing of future cash recoveries of the recorded asset may extend beyond 10 years.



Potential Legislation



On April 6, 2004, S.2290 (Fairness in Asbestos Injury Resolution Act of 2004) was introduced
in the Senate. On April 22, 2004, proponents of the bill failed to obtain sufficient votes to pass a cloture motion to bring the bill to the Senate floor, which effectively stopped the bill from being considered. Since April 22, the Senate
leadership has been involved in negotiations to explore whether a compromise on the merits of the bill can be reached; to date there has been no resolution. There is uncertainty as to whether the current or any other proposal will become law, and
what impact there might be on AWIs asbestos liability and/or AWIs Chapter 11 Case. Prior efforts to enact asbestos legislation have not been successful.



Conclusion



Many uncertainties continue to exist about the matters impacting AWIs asbestos-related liability and insurance asset. These uncertainties include when and if the
POR will be confirmed by the U.S. District Court, the impact of any potential legislation, and the financial condition of AWIs insurance carriers.



Additionally, if the POR is confirmed, AWI is unable to predict when it will be implemented. Therefore, the timing and terms of resolution of the Chapter 11 Case remain
uncertain. As long as this uncertainty exists, future changes to the recorded liability and insurance asset are possible and could be material to AWIs financial position and the results of its operations. Management will continue to review the
recorded liability and insurance asset in light of future developments in the Chapter 11 Case and make changes to the recorded amounts if and when it is appropriate.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



ENVIRONMENTAL MATTERS



Environmental Expenditures



Most of our manufacturing and certain of our research facilities are affected by various
federal, state and local environmental requirements relating to the discharge of materials or the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at our operating facilities. As
a result of continuous changes in regulatory requirements, we cannot predict with certainty future expenditures associated with compliance with environmental requirements.



Environmental Remediation



Summary



We are involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), and similar state
Superfund laws at approximately 26 sites. In most cases, we are one of many potentially responsible parties (PRPs) which have potential liability for the required investigation and remediation of each site and which, in some
cases, have agreed to jointly fund that required investigation and remediation. With regard to some sites, however, we dispute the liability, the proposed remedy or the proposed cost allocation among the PRPs. We may have rights of contribution or
reimbursement from other parties or coverage under applicable insurance policies.



We have also been remediating environmental contamination resulting from past industrial activity at certain of our former plant sites. Estimates of our future environmental liability at the Superfund sites and current or former plant sites
are based on evaluations of currently available facts regarding each individual site and consider factors such as our activities in conjunction with the site, existing technology, presently enacted laws and regulations and prior company experience
in remediating contaminated sites. Although current law imposes joint and several liability on all parties at Superfund sites, our contribution to the remediation of these sites is expected to be limited by the number of other companies also
identified as potentially liable for site remediation. As a result, our estimated liability reflects only our expected share. In determining the probability of contribution, we consider the solvency of the parties, whether liability is being
disputed, the terms of any existing agreements and experience with similar matters. Additionally, the Chapter 11 Case also may affect the ultimate amount of such contributions.



Effects of Chapter 11



Certain of AWIs environmental liabilities are subject to discharge through its Chapter 11 Case while others are not. AWIs payments and remediation work on
such sites for which AWI is a PRP is under review in light of the Chapter 11 Filing. The bar date for claims from the United States Environmental Protection Agency (EPA) expired during the third quarter of 2003. AWI received an
unliquidated proof of claim from the EPA. Those environmental obligations that AWI has with respect to property that it owns or operates are likely to be unaffected by the Chapter 11 Case. Therefore, AWI will be required to continue meeting its
on-going environmental compliance obligations at the properties that AWI owns or operates. AWI will also be required to address the effects of any contamination at those sites, even if the contamination predated Chapter 11 Filing. In addition, AWI
may be obligated to remedy the off-site impact of activities that occurred on the properties it owns and operates.



Monetary claims with respect to properties that AWI does not own or operate (such as formerly owned sites, or landfills to which AWIs waste was taken) may be
discharged in AWIs Chapter 11 Case. Accordingly, claims brought by the federal or a state agency alleging that AWI should reimburse the claimant for money that it spent cleaning up a site which AWI does not own or operate would be subject to
discharge, provided the claimant received proper notice of the bankruptcy and bar date. The same would be true for monetary claims by private parties, such as other PRPs with respect to multiple party sites. Under the POR, the Superfund sites at
which AWI is alleged to be a PRP are being treated as unsecured liabilities subject to compromise. Other Superfund sites relate to entities that are not part of AWIs Chapter 11 Case and therefore will not be discharged.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



In addition to the right to sue for reimbursement of the money it spends, CERCLA also gives the federal government
the right to sue for an injunction compelling a defendant to perform a cleanup. Several state statutes give similar injunctive rights to those States. Bankruptcy law is unsettled as to whether these injunctive rights are dischargeable or not. Thus,
according to some cases, while a governmental agencys right to require AWI to reimburse it for the costs of cleaning up a site may be dischargeable, the same government agencys right to compel us to spend our money cleaning up the same
site may not be, even though the financial impact to AWI would be the same in both instances.



AWIs strategy has been to try to resolve as many of its environmental liabilities through its Chapter 11 Case as possible. AWI has been negotiating with the Department of Justice and the EPA to reach an
environmental settlement on approximately 30 sites. AWI has asked the federal government to agree, as it did in other settlements with debtors in their bankruptcies, to covenant not to sue us for either monetary or injunctive relief, in exchange for
an allowed claim amount in the bankruptcy with respect to known claims concerning sites that AWI does not own or operate. Under the proposed settlement, AWI would have contribution protection under CERCLA with respect to private party claims. In
addition, AWI would have the benefit of the discharge as to monetary claims. At this point, the parties are still in the process of negotiating a settlement.



If no settlement is reached, AWI anticipates that it will ask the Bankruptcy Court to determine the amount of the EPA proof of claim and grant a discharge. At that time,
the government may seek to have the amount of its claim determined as the total cost of cleanup under a theory of joint and several liability, not just AWIs share. As discussed above, although the governments right to monetary relief is
subject to discharge, there is uncertainty in the law as to whether the governments right to injunctive relief would also be subject to discharge.



Specific Events



In 2001, the EPA notified AWI that it may be a PRP at the Peterson Puritan site. However, AWI did not learn that the EPA may consider it a substantial contributor of waste to the site until July 2003. At that time,
the EPA notified AWI of the EPAs estimate of the sites future cleanup costs, with its assessment of AWIs share of the costs being a range of $17.8 million to $26.2 million. Subsequently, AWI presented information to the EPA
indicating that AWIs share should be much lower. Presently, the parties are continuing to negotiate. The EPA has not initiated any formal proceedings against AWI with respect to this site, other than sending information requests to AWI and
filing a proof of claim in AWIs Chapter 11 Case. AWI continues to review this matter but disputes the assessment. As discussed above (Effects of Chapter 11), management is currently in discussions with the Department of Justice and the
EPA to reach an environmental settlement, which may resolve the proof of claim against AWI, including this site.



AWI is subject to a unilateral order by the Oregon Department of Environmental Quality (DEQ) to conduct a remedial investigation and feasibility study and any
necessary remedial design and action at its St. Helens, Oregon facility, as well as the adjacent Scappoose Bay. AWI has denied liability for Scappoose Bay, but has cooperated with the DEQ regarding its owned property. Other potentially responsible
parties who are not yet subject to orders by the DEQ include former site owners Owens Corning (OC) and Kaiser Gypsum Company, Inc. (Kaiser). AWI has entered into an agreement with Kaiser for the sharing of costs and
responsibilities with respect to the remedial investigation, feasibility study and remedy selection at the site. OC has entered into a settlement with the DEQ. Pursuant to the settlement, OC has made a lump sum payment to the DEQ in exchange for
contribution protection (including protection against common law and statutory contribution claims by AWI against OC) and a covenant not to sue. AWI has negotiated with the DEQ as to how these funds will be made available for the investigation and
remediation of the site. AWI has recorded an environmental liability with respect to the investigation and feasibility study at its St. Helens facility, but not for Scappoose Bay because AWI continues to dispute responsibility for
contamination of Scappoose Bay.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



Summary of Financial Position



Liabilities of $25.3 million and $21.2 million at June 30, 2004 and December 31, 2003, respectively, were for potential environmental
liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made. The majority of this increase relates to developments in the Peterson Puritan site described in Specific Events
above. Where existing data is sufficient to estimate the liability, that estimate has been used; where only a range of probable liabilities is available and no amount within that range is more likely than any other, the lower end of the range has
been used. As assessments and remediation activities progress at each site, these liabilities are reviewed to reflect additional information as it becomes available. Due to the Chapter 11 Filing, $16.3 million of the June 30, 2004 and $12.8 million
of the December 31, 2003 environmental liabilities are classified as prepetition liabilities subject to compromise. As a general rule, the Chapter 11 process does not preserve company assets for such prepetition liabilities.



The estimated liabilities above do not take into account any claims for recoveries from
insurance or third parties. Such recoveries, where probable, have been recorded as an asset in the condensed consolidated financial statements and are either available through settlement or anticipated to be recovered through negotiation or
litigation. The amount of the recorded asset for estimated recoveries was $2.4 million and $2.5 million at June 30, 2004 and December 31, 2003, respectively.



Actual costs to be incurred at identified sites may vary from our estimates. Based on our current knowledge of the identified sites, we believe that any sum we may have
to pay in connection with environmental matters in excess of the amounts noted above would not have a material adverse effect on our financial condition, or liquidity, although the recording of future costs may be material to earnings in such future
period.



PATENT INFRINGEMENT CLAIMS



We are a defendant in two related lawsuits claiming patent infringement
related to some of our laminate products. The plaintiffs have claimed unspecified monetary damages. We are being defended and indemnified by our supplier for all costs and potential damages related to the litigation.



FORMER EMPLOYEES CLAIM



Former Armstrong employees that were separated from the company in two business divestitures
in 2000 brought two purported class actions against the Retirement Committee of AWI, certain current and former members of the Retirement Committee, the Retirement Savings and Stock Ownership Plan (RSSOP), AHI and the trustee bank of the RSSOP.
Plaintiffs alleged breach of Employee Retirement Income Security Act (ERISA) fiduciary duties and other violations of ERISA pertaining to losses in their RSSOP accounts, which were invested in Armstrong common stock.



An agreement was reached to settle this matter. Contributors to the settlement were AWI, its
insurer and the trustee bank of the RSSOP. The full amount of the settlement was allocated in December 2003 among approximately 370 former employees. AWIs portion of the settlement is $1.0 million, which will be treated as convenience claims
in the Chapter 11 Case. The settlement was approved by the Bankruptcy Court on March 31, 2003 and by the United States District Court (Eastern District of PA) on June 16, 2003. Based upon the Bankruptcy Courts approval of the settlement, AWI
recorded a $1.0 million charge in the first quarter of 2003 as an other non-operating expense.



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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions,
except share data)



DEPARTMENT OF LABOR SETTLEMENT



Subsequent to an audit by the United States Department of Labor (DOL), we were
informed that the DOL was challenging the validity of the use of certain contributions, in the approximate aggregate amount of $33.4 million, to fund debt payments made by the Armstrong Employee Stock Ownership Plan (ESOP), as provided
for by that plan. We reached a settlement with the DOL to resolve this matter with a funding to the ESOP of $1.5 million, which was distributed to plan participants in accordance with terms of the agreement in February 2004. Insurance and third
parties funded $0.9 million of the settlement. Both the accrual of $1.5 million expense and $0.9 million insurance receivable were recorded in the third quarter of 2003 in SG&A.



OTHER CLAIMS



Additionally, we are involved in various other claims and legal actions involving product liability, patent infringement, distributor
termination, employment law issues and other actions arising in the ordinary course of business. While complete assurance cannot be given to the outcome of these claims, we do not expect that any sum that may have to be paid in connection with these
matters will have a materially adverse effect on our consolidated financial position or liquidity, however it could be material to the results of operations in the particular period in which a matter is resolved.



NOTE 13. EARNINGS PER SHARE



The difference between the average number of basic and diluted common shares outstanding is
due to contingently issuable shares. Earnings per share components may not add due to rounding.



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##### Table of Contents

Independent Registered Public Accounting Firm Review Report



The Board of Directors and Shareholders

Armstrong Holdings, Inc.:



We have reviewed the accompanying condensed consolidated balance sheet of Armstrong Holdings, Inc., and subsidiaries (the
Company) as of June 30, 2004, and the related condensed consolidated statements of earnings for the three- and six- month periods ended June 30, 2004 and 2003, and the related condensed consolidated statements of cash flows and
shareholders equity for the six-month periods ended June 30, 2004 and 2003. These condensed consolidated financial statements are the responsibility of the Companys management.



We conducted our review in accordance with standards established by the Public Company
Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less
in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.



Based on our review, we are
not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.



We have previously audited, in accordance with standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Armstrong Holdings, Inc., and subsidiaries as of December 31, 2003, and the related consolidated statements of earnings, cash flows and shareholders equity for the year then
ended (not presented herein); and in our report dated February 25, 2004, we expressed an unqualified opinion on those consolidated financial statements. Our report dated February 25, 2004 contains an explanatory paragraph that states that three of
the Companys domestic subsidiaries, including Armstrong World Industries, Inc., the Companys major operating subsidiary, filed separate voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court on December 6, 2000, and that the filing under Chapter 11 and the increased uncertainty regarding the Companys potential asbestos liability raise substantial doubt about the Companys ability to continue as a going
concern. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been
derived.



/s/ KPMG LLP



Philadelphia, Pennsylvania

July 28, 2004



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Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Earnings

(amounts in millions)

Unaudited



|                                                                                 |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                 |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                                                                 |  | 2004                        |       |   | 2003                      |   |       | 2004 |  |   | 2003    |  
|Net sales                                                                        |  | $                           | 903.5 |   |                           | $ | 826.9 |      |  | $ | 1,748.5 |   |  | $ | 1,601.8 |  
|Cost of goods sold                                                               |  |                             | 687.1 |   |                           |   | 646.5 |      |  |   | 1,347.5 |   |  |   | 1,254.9 |  
|                                                                                 |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  
|Gross profit                                                                     |  |                             | 216.4 |   |                           |   | 180.4 |      |  |   | 401.0   |   |  |   | 346.9   |  
|Selling, general and administrative expenses                                     |  |                             | 162.3 |   |                           |   | 146.0 |      |  |   | 309.9   |   |  |   | 303.3   |  
|Charge for asbestos liability, net                                               |  |                             |      |   |                           |   | 73.0  |      |  |   |        |   |  |   | 73.0    |  
|Goodwill impairment                                                              |  |                             | 60.0  |   |                           |   |      |      |  |   | 60.0    |   |  |   |        |  
|Restructuring and reorganization charges, net                                    |  |                             | 1.1   |   |                           |   | 0.9   |      |  |   | 3.1     |   |  |   | 4.1     |  
|Equity (earnings) from affiliates, net                                           |  |                             | (10.6 | ) |                           |   | (6.1  | )    |  |   | (17.2   | ) |  |   | (11.4   | )
|                                                                                 |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  
|Operating income/(loss)                                                          |  |                             | 3.6   |   |                           |   | (33.4 | )    |  |   | 45.2    |   |  |   | (22.1   | )
|Interest expense (unrecorded contractual interest of $21.7, $25.0, $43.4, $49.8) |  |                             | 2.2   |   |                           |   | 2.6   |      |  |   | 4.4     |   |  |   | 5.4     |  
|Other non-operating expense                                                      |  |                             | 1.6   |   |                           |   | 1.2   |      |  |   | 3.5     |   |  |   | 2.5     |  
|Other non-operating (income)                                                     |  |                             | (1.1  | ) |                           |   | (0.9  | )    |  |   | (2.3    | ) |  |   | (1.7    | )
|Chapter 11 reorganization costs, net                                             |  |                             | 1.8   |   |                           |   | 5.9   |      |  |   | 4.3     |   |  |   | 9.9     |  
|                                                                                 |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  
|Earnings/(loss) before income taxes                                              |  |                             | (0.9  | ) |                           |   | (42.2 | )    |  |   | 35.3    |   |  |   | (38.2   | )
|Income tax expense/(benefit)                                                     |  |                             | 13.6  |   |                           |   | (7.9  | )    |  |   | 30.2    |   |  |   | (5.8    | )
|                                                                                 |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  
|Net earnings/(loss)                                                              |  | $                           | (14.5 | ) |                           | $ | (34.3 | )    |  | $ | 5.1     |   |  | $ | (32.4   | )
|                                                                                 |  |                             |       |   |                           |   |       |      |  |   |         |   |  |   |         |  



See
accompanying notes to condensed consolidated financial statements beginning on page 37.



33



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Balance Sheets

(amounts in millions, except share data)



|                                                                                                                     |  |                        |          |   |                   |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                     |  | UnauditedJune 30, 2004 |          |   | December 31, 2003 |  
|Assets                                                                                                               |  |                        |          |   |                   |   |          |  
|Current Assets:                                                                                                      |  |                        |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                            |  | $                      | 494.3    |   |                   | $ | 484.3    |  
|Accounts and notes receivable, net                                                                                   |  |                        | 381.2    |   |                   |   | 315.4    |  
|Inventories, net                                                                                                     |  |                        | 475.9    |   |                   |   | 454.4    |  
|Deferred income taxes                                                                                                |  |                        | 19.1     |   |                   |   | 19.2     |  
|Other current assets                                                                                                 |  |                        | 90.0     |   |                   |   | 85.5     |  
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Total current assets                                                                                                 |  |                        | 1,460.5  |   |                   |   | 1,358.8  |  
|Property, plant and equipment, less accumulated depreciation and amortization of $1,464.3 and $1,434.8, respectively |  |                        | 1,224.3  |   |                   |   | 1,267.3  |  
|Insurance receivable for asbestos-related liabilities, noncurrent                                                    |  |                        | 87.1     |   |                   |   | 95.1     |  
|Prepaid pension costs                                                                                                |  |                        | 466.1    |   |                   |   | 455.1    |  
|Investment in affiliates                                                                                             |  |                        | 66.2     |   |                   |   | 48.9     |  
|Goodwill, net                                                                                                        |  |                        | 181.0    |   |                   |   | 244.1    |  
|Other intangibles, net                                                                                               |  |                        | 76.0     |   |                   |   | 79.0     |  
|Deferred income taxes, noncurrent                                                                                    |  |                        | 989.2    |   |                   |   | 988.3    |  
|Other noncurrent assets                                                                                              |  |                        | 112.3    |   |                   |   | 111.2    |  
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Total assets                                                                                                         |  | $                      | 4,662.7  |   |                   | $ | 4,647.8  |  
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Liabilities and Shareholders Equity                                                                                 |  |                        |          |   |                   |   |          |  
|Current liabilities:                                                                                                 |  |                        |          |   |                   |   |          |  
|Short-term debt                                                                                                      |  | $                      | 17.2     |   |                   | $ | 3.9      |  
|Current installments of long-term debt                                                                               |  |                        | 7.4      |   |                   |   | 8.2      |  
|Accounts payable and accrued expenses                                                                                |  |                        | 378.4    |   |                   |   | 354.2    |  
|Short term amounts due to affiliates                                                                                 |  |                        | 9.8      |   |                   |   | 10.0     |  
|Income taxes                                                                                                         |  |                        | 26.3     |   |                   |   | 45.9     |  
|Deferred income taxes                                                                                                |  |                        | 3.3      |   |                   |   | 3.3      |  
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Total current liabilities                                                                                            |  |                        | 442.4    |   |                   |   | 425.5    |  
|Liabilities subject to compromise                                                                                    |  |                        | 4,866.8  |   |                   |   | 4,863.2  |  
|Long-term debt, less current installments                                                                            |  |                        | 35.5     |   |                   |   | 39.4     |  
|Postretirement and postemployment benefit liabilities                                                                |  |                        | 261.9    |   |                   |   | 262.3    |  
|Pension benefit liabilities                                                                                          |  |                        | 211.6    |   |                   |   | 216.4    |  
|Other long-term liabilities                                                                                          |  |                        | 84.6     |   |                   |   | 81.2     |  
|Deferred income taxes                                                                                                |  |                        | 95.1     |   |                   |   | 95.1     |  
|Minority interest in subsidiaries                                                                                    |  |                        | 9.9      |   |                   |   | 9.7      |  
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Total noncurrent liabilities                                                                                         |  |                        | 5,565.4  |   |                   |   | 5,567.3  |  
|Shareholders equity (deficit):                                                                                      |  |                        |          |   |                   |   |          |  
|Common stock, $1 par value per share Authorized 200 million shares; issued 51,878,910 shares                         |  |                        | 51.9     |   |                   |   | 51.9     |  
|Capital in excess of par value                                                                                       |  |                        | 172.9    |   |                   |   | 172.7    |  
|Reduction for ESOP loan guarantee                                                                                    |  |                        | (142.2   | ) |                   |   | (142.2   | )
|Accumulated deficit                                                                                                  |  |                        | (937.1   | ) |                   |   | (942.2   | )
|Accumulated other comprehensive income                                                                               |  |                        | 37.9     |   |                   |   | 43.3     |  
|Less common stock in treasury, at cost 2004 and 2003  11,393,170 shares                                             |  |                        | (528.5   | ) |                   |   | (528.5   | )
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Total shareholders (deficit)                                                                                        |  |                        | (1,345.1 | ) |                   |   | (1,345.0 | )
|                                                                                                                     |  |                        |          |   |                   |   |          |  
|Total liabilities and shareholders equity                                                                           |  | $                      | 4,662.7  |   |                   | $ | 4,647.8  |  
|                                                                                                                     |  |                        |          |   |                   |   |          |  



See
accompanying notes to condensed consolidated financial statements beginning on page 37.



34



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Shareholders Equity

(amounts in millions,
except per share amounts)

Unaudited



|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|---------------------------------------------- |  | ---- | -------- | - | ---- | - | ---- | - |  | - | -------- | - |  | - | ----- | -
|                                               |  | 2004 |          |   | 2003 |  
|Common stock, $1 par value:                    |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at beginning of year and June 30       |  | $    | 51.9     |   |      |   |      |   |  | $ | 51.9     |   |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Capital in excess of par value:                |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at beginning of year                   |  | $    | 172.7    |   |      |   |      |   |  | $ | 172.9    |   |  |   |       |  
|Stock issuances and other                      |  |      | 0.2      |   |      |   |      |   |  |   |         |   |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at June 30                             |  | $    | 172.9    |   |      |   |      |   |  | $ | 172.9    |   |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Reduction for ESOP loan guarantee:             |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at beginning of year and June 30       |  | $    | (142.2   | ) |      |   |      |   |  | $ | (142.2   | ) |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Retained earnings (accumulated deficit):       |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at beginning of year                   |  | $    | (942.2   | ) |      |   |      |   |  | $ | (902.9   | ) |  |   |       |  
|Net earnings/(loss) for period                 |  |      | 5.1      |   |      | $ | 5.1  |   |  |   | (32.4    | ) |  | $ | (32.4 | )
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at June 30                             |  | $    | (937.1   | ) |      |   |      |   |  | $ | (935.3   | ) |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Accumulated other comprehensive income (loss): |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at beginning of year                   |  | $    | 43.3     |   |      |   |      |   |  | $ | (12.2    | ) |  |   |       |  
|Foreign currency translation adjustments       |  |      | (6.0     | ) |      |   |      |   |  |   | 28.5     |   |  |   |       |  
|Derivative gain, net                           |  |      | 0.4      |   |      |   |      |   |  |   | 0.4      |   |  |   |       |  
|Minimum pension liability adjustments          |  |      | 0.2      |   |      |   |      |   |  |   | (1.4     | ) |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Total other comprehensive income (loss)        |  |      | (5.4     | ) |      |   | (5.4 | ) |  |   | 27.5     |   |  |   | 27.5  |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at June 30                             |  | $    | 37.9     |   |      |   |      |   |  | $ | 15.3     |   |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Comprehensive (loss)                           |  |      |          |   |      | $ | (0.3 | ) |  |   |          |   |  | $ | (4.9  | )
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Less treasury stock at cost:                   |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Balance at beginning of year and June 30       |  | $    | (528.5   | ) |      |   |      |   |  | $ | (528.5   | ) |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  
|Total shareholders (deficit)                  |  | $    | (1,345.1 | ) |      |   |      |   |  | $ | (1,365.9 | ) |  |   |       |  
|                                               |  |      |          |   |      |   |      |   |  |   |          |   |  |   |       |  



See
accompanying notes to condensed consolidated financial statements beginning on page 37.



35



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

Unaudited



|                                                                                 |  |                           |       |   |      |   |       |  
|-------------------------------------------------------------------------------- |  | ------------------------- | ----- | - | ---- | - | ----- | -
|                                                                                 |  | Six Months Ended June 30, |      
|                                                                                 |  | 2004                      |       |   | 2003 |  
|Cash flows from operating activities:                                            |  |                           |       |   |      |   |       |  
|Net earnings (loss)                                                              |  | $                         | 5.1   |   |      | $ | (32.4 | )
|Adjustments to reconcile net earnings to net cash used for operating activities: |  |                           |       |   |      |   |       |  
|Depreciation and amortization                                                    |  |                           | 70.1  |   |      |   | 70.7  |  
|Deferred income taxes                                                            |  |                           | (0.2  | ) |      |   | (25.4 | )
|Equity (earnings) from affiliates, net                                           |  |                           | (17.2 | ) |      |   | (11.4 | )
|Chapter 11 reorganization costs, net                                             |  |                           | 4.3   |   |      |   | 9.9   |  
|Chapter 11 reorganization costs payments                                         |  |                           | (10.5 | ) |      |   | (12.9 | )
|Restructuring and reorganization charges, net of reversals                       |  |                           | 3.1   |   |      |   | 4.1   |  
|Restructuring and reorganization payments                                        |  |                           | (1.6  | ) |      |   | (2.1  | )
|Goodwill impairment                                                              |  |                           | 60.0  |   |      |   |      |  
|Asbestos-related insurance recoveries                                            |  |                           | 4.5   |   |      |   | 14.0  |  
|Charge for asbestos liability, net                                               |  |                           |      |   |      |   | 73.0  |  
|Cash effect of hedging activities                                                |  |                           | 7.0   |   |      |   | (11.6 | )
|Increase (decrease) in cash from change in:                                      |  |                           |       |   |      |   |       |  
|Receivables                                                                      |  |                           | (69.2 | ) |      |   | (62.6 | )
|Inventories                                                                      |  |                           | (25.0 | ) |      |   | (28.4 | )
|Other current assets                                                             |  |                           | 3.8   |   |      |   | (2.0  | )
|Other noncurrent assets                                                          |  |                           | (14.0 | ) |      |   | (7.5  | )
|Accounts payable and accrued expenses                                            |  |                           | 35.6  |   |      |   | (23.4 | )
|Income taxes payable                                                             |  |                           | (19.5 | ) |      |   | 12.7  |  
|Other long-term liabilities                                                      |  |                           | 6.2   |   |      |   | 3.0   |  
|Other, net                                                                       |  |                           | (3.8  | ) |      |   | (0.3  | )
|                                                                                 |  |                           |       |   |      |   |       |  
|Net cash provided by (used for) operating activities                             |  |                           | 38.7  |   |      |   | (32.6 | )
|                                                                                 |  |                           |       |   |      |   |       |  
|Cash flow from investing activities:                                             |  |                           |       |   |      |   |       |  
|Purchases of property, plant and equipment and computer software                 |  |                           | (38.6 | ) |      |   | (39.6 | )
|Distributions from equity affiliates                                             |  |                           |      |   |      |   | 7.0   |  
|Proceeds from the sale of assets                                                 |  |                           | 1.2   |   |      |   | 1.8   |  
|                                                                                 |  |                           |       |   |      |   |       |  
|Net cash (used for) investing activities                                         |  |                           | (37.4 | ) |      |   | (30.8 | )
|                                                                                 |  |                           |       |   |      |   |       |  
|Cash flows from financing activities:                                            |  |                           |       |   |      |   |       |  
|Increase in short-term debt, net                                                 |  |                           | 13.5  |   |      |   | 0.4   |  
|Payments of long-term debt                                                       |  |                           | (3.6  | ) |      |   | (2.3  | )
|Other, net                                                                       |  |                           | (0.3  | ) |      |   |      |  
|                                                                                 |  |                           |       |   |      |   |       |  
|Net cash provided by (used for) financing activities                             |  |                           | 9.6   |   |      |   | (1.9  | )
|                                                                                 |  |                           |       |   |      |   |       |  
|Effect of exchange rate changes on cash and cash equivalents                     |  |                           | (0.9  | ) |      |   | 4.2   |  
|                                                                                 |  |                           |       |   |      |   |       |  
|Net increase (decrease) in cash and cash equivalents                             |  | $                         | 10.0  |   |      | $ | (61.1 | )
|Cash and cash equivalents at beginning of year                                   |  |                           | 484.3 |   |      |   | 380.0 |  
|                                                                                 |  |                           |       |   |      |   |       |  
|Cash and cash equivalents at end of period                                       |  | $                         | 494.3 |   |      | $ | 318.9 |  
|                                                                                 |  |                           |       |   |      |   |       |  



See
accompanying notes to condensed consolidated financial statements beginning on page 37.



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 1. BASIS OF PRESENTATION



Armstrong World Industries, Inc. (AWI) is a Pennsylvania corporation
incorporated in 1891. Armstrong Holdings, Inc. is a Delaware corporation and the publicly held parent holding company of AWI. Armstrong Holdings, Inc.s only significant asset and operation is its indirect ownership, through Armstrong
Worldwide, Inc., of all of the capital stock of AWI. We include separate financial statements for Armstrong Holdings, Inc. and its subsidiaries and AWI and its subsidiaries in this report because both companies have public securities that are
registered under the Securities Exchange Act of 1934. The difference between the financial statements of Armstrong Holdings, Inc. and its subsidiaries and AWI and its subsidiaries is primarily due to transactions that occurred in 2000 related to the
formation of Armstrong Holdings, Inc. and to employee compensation-related stock activity. However, there are no differences in the income statements presented in this report for Armstrong Holdings, Inc. and its subsidiaries and AWI and its
subsidiaries, and minimal differences in the remaining three financial statements of each entity. Due to the lack of material differences in the financial statements, when we refer in this document to Armstrong Holdings, Inc. and its subsidiaries as
AHI, Armstrong, we, us, and ourselves, we are also effectively referring to AWI and its subsidiaries. We use the term AWI when we are referring solely to Armstrong World
Industries, Inc.



The accounting policies used in preparing these statements
are the same as those used in preparing AHIs condensed consolidated financial statements for the year ended December 31, 2003, which includes the accounts of AHI and its majority-owned subsidiaries. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements and notes thereto included in AHIs Form 10-K for the fiscal year ended December 31, 2003. In the opinion of management, all adjustments of a normal recurring
nature have been included to provide a fair statement of the results for the reporting periods presented. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year
and the possibility of changes in general economic conditions.



Operating
results for the second quarter and first six months of 2004 and the corresponding periods of 2003 included in this report are unaudited. Certain prior year amounts have been reclassified to conform to the current year presentation.



The following disclosure is provided in accordance with SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. The following table illustrates the effect on net income if AHI had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-based
Compensation, to stock-based employee compensation.



|                                                                                                                                            |  |                             |       |   |                           |   |       |      |  |      |     |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | ---- | --- |  | - | ----- | -
|                                                                                                                                            |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                                                                                                                            |  | 2004                        |       |   | 2003                      |   |       | 2004 |  | 2003 |    
|Net income/(loss), as reported                                                                                                              |  | $                           | (14.5 | ) |                           | $ | (34.3 | )    |  | $    | 5.1 |  | $ | (32.4 | )
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                                  |  |                             |      |   |                           |   |      |      |  |      |    |  |   | 0.1   |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             |      |   |                           |   | (0.1  | )    |  |      |    |  |   | (0.2  | )
|                                                                                                                                            |  |                             |       |   |                           |   |       |      |  |      |     |  |   |       |  
|Pro forma net income/(loss)                                                                                                                 |  | $                           | (14.5 | ) |                           | $ | (34.4 | )    |  | $    | 5.1 |  | $ | (32.5 | )
|                                                                                                                                            |  |                             |       |   |                           |   |       |      |  |      |     |  |   |       |  



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 2. CHAPTER 11 REORGANIZATION

Proceedings under Chapter 11



On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a voluntary petition for relief (the Filing) under Chapter 11 of the U.S. Bankruptcy
Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court) in order to use the court-supervised reorganization process to achieve a resolution of the AWIs
asbestos-related liability. Also filing under Chapter 11 were two of AWIs wholly-owned subsidiaries, Nitram Liquidators, Inc. (Nitram) and Desseaux Corporation of North America, Inc. (Desseaux). The Chapter 11 cases are
being jointly administered under case number 00-4471 (the Chapter 11 Case). Shortly after its commencement, the Chapter 11 Case was assigned to Judge Randall J. Newsome. His appointment as a visiting judge in the District of Delaware
ended on December 31, 2003. On January 6, 2004, the Chapter 11 Case was reassigned to Judge Judith K. Fitzgerald.



AHI and all of AWIs other direct and indirect subsidiaries, including Armstrong Wood Products Inc. (formerly Triangle Pacific Corp.), WAVE (AWIs ceiling grid
systems joint venture with Worthington Industries, Inc.), Armstrong Canada, and Armstrong DLW AG, were not a part of the Filing and accordingly, except for any asbestos-related liability that also relates, directly or indirectly, to the pre-Filing
activities of AWI, the liabilities, including asbestos-related liability if any, of such companies will not be resolved in AWIs Chapter 11 Case. See below under The Asbestos Personal Injury Trust and Note 12 under
Asbestos-Related Litigation.



AWI is operating its business and
managing its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims or obligations which arose prior to the Filing date
(prepetition claims) unless specifically authorized by the Bankruptcy Court. Similarly, claimants may not enforce any claims against AWI that arose prior to the date of the Filing unless specifically authorized by the Bankruptcy Court. In addition,
as a debtor-in-possession, AWI has the right, subject to the Bankruptcy Courts approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the Filing. Some of these have been specifically assumed and
others have been specifically rejected already in the course of the Chapter 11 Case. In the plan of reorganization which it has proposed, as described below, AWI has indicated the other executory contracts and unexpired leases that it intends to
assume or reject upon consummation of the plan; any not specifically assumed under the plan will be rejected upon consummation of the plan. Parties having claims as a result of the rejection of a contract may file claims with the Bankruptcy Court,
which will be dealt with as part of the Chapter 11 Case.



Three creditors
committees, one representing asbestos personal injury claimants (the Asbestos Personal Injury Claimants Committee), one representing asbestos property damage claimants (the Asbestos Property Damage Committee), and the
other representing other unsecured creditors (the Unsecured Creditors Committee), were appointed in the Chapter 11 Case. In addition, an individual was appointed to represent the interests of future asbestos personal injury
claimants (the Future Claimants Representative). In accordance with the provisions of the Bankruptcy Code, these parties have the right to be heard on matters that come before the Bankruptcy Court in the Chapter 11 Case. Upon
resolution of all asbestos property damage claims, the Asbestos Property Damage Committee was disbanded.



Plan of Reorganization



On November 4, 2002, AWI filed a Plan of Reorganization with the Bankruptcy Court. During 2003, AWI filed several amendments to the plan with the Bankruptcy Court, along
with various exhibits. The Fourth Amended Plan of Reorganization, with certain exhibits, was filed on May 23, 2003 and, as so amended and as modified by modifications filed with the Bankruptcy Court on October 17, 2003 and November 10, 2003, is
referred to in this report as the POR. The POR provides for AWI to continue to conduct its existing lines of business with a reorganized capital structure under which, among other things, its existing shares of stock will be cancelled
and new common shares and notes will be issued to its unsecured creditors and to a trust, as further discussed below, to be established under the POR for the benefit of AWIs current and future asbestos-related personal injury claimants, in
full satisfaction of their claims against AWI. References in this report to reorganized Armstrong are to AWI as it would be reorganized



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



under the POR, and its subsidiaries collectively. The POR excludes AWIs Nitram and Desseaux subsidiaries, neither of which is material to Armstrong and
which are pursuing separate resolutions of their Chapter 11 cases that are expected to result in the winding up of their affairs.



During 2003, the POR was submitted for a vote by AWIs creditors for its approval. It was approved by each creditor class that was entitled to vote on the POR except
the class of unsecured creditors. On November 17 and 18, 2003, the Bankruptcy Court held a hearing on confirmation of the Plan and on December 19, 2003, issued proposed findings of fact and conclusions of law and a proposed order confirming the POR,
notwithstanding the rejection of the POR by the class of unsecured creditors. On December 29, 2003, the Unsecured Creditors Committee filed an objection to the Bankruptcy Courts proposed findings of fact and conclusions of law and the
proposed order of confirmation of the POR. This objection remains pending with the U.S. District Court. The Bankruptcy Code requires action of the U.S. District Court, in addition to that of the Bankruptcy Court, to approve the POR. Proceedings in
the U.S. District Court were stayed in late 2003, due to a controversy relating to the judge. A new judge was assigned to the case, and proceedings are expected to resume after the judge assesses the status of the case. See Recent Developments
and Next Steps in the Chapter 11 Process.



Disclosure Statement



In connection with the vote of creditors
on the POR, AWI was required to prepare a disclosure statement concerning its business and the POR, including certain projected financial information assuming an Effective Date of the POR as July 1, 2003, intended to demonstrate to the Bankruptcy
Court the feasibility of the POR and AWIs ability to continue operations upon its emergence from Chapter 11. On May 30, 2003, the Bankruptcy Court approved the disclosure statement for distribution to parties in interest in the Chapter 11
Case. The projected financial information included in the disclosure statement was updated in certain respects by information submitted to the Bankruptcy Court in connection with the Bankruptcy Courts November 2003 hearing on confirmation of
the POR. The projected financial information was prepared for the limited purposes of consideration by the Bankruptcy Court, creditors and other parties in interest in the Chapter 11 Case of matters pertinent to the case. As indicated in the
disclosure statement, the projected financial information and various estimates of value therein provided should not be regarded as representations or warranties by AWI, AHI or any other person. There is no assurance that any such projection or
valuation will be realized. The projected financial information and estimates of value were prepared by AWI and its financial advisors and have not been audited or reviewed by independent accountants. The projections will not be updated on an
ongoing basis. At the time they were prepared, the projections reflected numerous assumptions concerning reorganized Armstrongs anticipated future performance and with respect to prevailing and anticipated market and economic conditions, which
were and remain beyond our control and which may not materialize. Projections are inherently subject to significant and numerous uncertainties and to a wide variety of significant business, economic and competitive risks and the assumptions
underlying the projections may be wrong in a material respect. Actual results may vary significantly from those contemplated by the projections.



Asbestos Personal Injury Trust



A principal feature of the POR is the creation of a trust (the Asbestos P I Trust), pursuant to section 524(g) of the Bankruptcy Code, for the purpose of
addressing AWIs personal injury (including wrongful death) asbestos-related liability. All present and future asbestos-related personal injury claims against AWI, including contribution claims of co-defendants, arising directly or indirectly
out of AWIs pre-Filing use of or other activities involving asbestos will be channeled to the Asbestos P I Trust.



In accordance with the 524(g) injunction to be issued by the District Court in connection with the confirmation of the POR, various entities will be protected
from such present and future AWI asbestos-related personal injury claims. These entities include, among others, AWI as it will be reorganized, AHI, AWIs subsidiaries and other affiliates (as defined in the POR), and their respective officers
and directors. Upon emergence from Chapter 11, AWI will not have any responsibility for these claims (including claims against AWI based solely on its ownership of a subsidiary or other affiliate), nor will it participate in their resolution.



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



However, although AWIs domestic and foreign subsidiaries and other affiliates will be protected parties,
asbestos-related personal injury claims against them will be channeled to the Asbestos P I Trust only to the extent such claims directly or indirectly relate to the pre-Filing manufacturing, installation, distribution or other activities of AWI, or
AWIs ownership of the subsidiaries or affiliates (as distinguished from independent activities of the subsidiaries or affiliates). See Note 12 under Asbestos-Related Litigation.



In addition, workers compensation claims brought against AWI or its subsidiaries or
other affiliates will not be channeled to the Asbestos P I Trust and will remain subject to the workers compensation process. Workers compensation law provides that the employer is responsible for evaluation, medical treatment and lost
wages as a result of a job-related injury. Historically, workers compensation claims against AWI or its subsidiaries have not been significant in number or amount, and AWI has continued to honor its obligations with respect to such claims
during the Chapter 11 Case. Currently, AWI has four pending workers compensation claims and its UK subsidiary has four employer liability claims involving alleged asbestos exposure.



There also is uncertainty as to proceedings, if any, brought in certain foreign jurisdictions
with respect to the effect of the 524(g) injunction in precluding the assertion in such jurisdictions of asbestos-related personal injury claims, proceedings related thereto or the enforcement of judgments rendered in such proceedings.



Management believes neither AWI nor its subsidiaries or other affiliates is subject to
asbestos-related personal injury claims, material in amount to reorganized Armstrong, that would not be channeled to the Asbestos P I Trust.



Consideration to Be Distributed under the POR (unaudited)



The Asbestos P I Trust and the holders of allowed unsecured claims will share in the following consideration to be distributed under the
POR:



| |  | AWIs Available Cash, which is defined in the POR as:
| | - | -------------------------------------------------------



| |  | Cash available on the effective date of the POR after reserving up to $100 million (as determined by AWI) to fund ongoing operations and making provisions for certain required
payments under the POR,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Any cash drawn, at AWIs sole discretion, under a credit facility to be established as provided by the POR for the purpose of funding distributions under the POR, and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Certain insurance proceeds related to environmental matters
| | - | -----------------------------------------------------------



However, proceeds received under any private offering of debt securities and/or secured term loan borrowings made, as permitted by the POR, in connection
with consummation of the POR shall be excluded from the determination of Available Cash.



| |  | Plan Notes of AWI as further described below or net cash proceeds from any private offerings of debt securities issued in lieu thereof, and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | Substantially all of the new common stock of AWI.
| | - | -------------------------------------------------



The total amount of Plan Notes will be the greater of (i) $1.125 billion less Available Cash and (ii) $775 million. However, AWI will use reasonable efforts to issue one
or more private offerings of debt securities on, or as soon as practicable after, the Effective Date. These offerings are to yield net proceeds at least equal to the amount of the Plan Notes prescribed by the Plan. If the private offerings are
successful, the Plan Notes would not be issued. If the offerings yield proceeds less than the amount of the Plan Notes prescribed by the Plan, Plan Notes equal to the difference will be issued. If only the Plan Notes are issued, reorganized
Armstrong expects to issue an aggregate amount of $775 million of Plan Notes. These Plan Notes will consist of (i) a tranche of notes with a seven-year maturity and a fixed interest rate, (ii) a tranche of notes with a ten-year maturity and a fixed
interest rate and (iii) a tranche of floating rate notes with a maturity of not less than five years, but no more than ten years, structured in a manner similar to, and as liquid as, marketable bank debt which satisfy the requirements of the POR and
are on terms and conditions that are satisfactory to AWI, the Asbestos Personal Injury Claimants Committee, and the



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Future Claimants Representative. To the extent Plan Notes of more than one type are issued, a pro rata share of each tranche will be issued to the
Asbestos P I Trust and the holders of unsecured claims.



The POR provides that
unsecured creditors, other than convenience creditors described below, will receive their pro rata share of:



| |  | 34.43% of the new common stock of reorganized Armstrong,
| | - | --------------------------------------------------------



| |  | 34.43% of the first $1.05 billion of all the cash and Plan Notes to be distributed under the POR to unsecured creditors (other than convenience creditors) and the Asbestos P I
Trust, in the form of:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Up to $300 million of Available Cash and
| | - | ----------------------------------------



| |  | The balance in principal amount of Plan Notes or in net cash proceeds from any private offerings of debt securities made in lieu of issuing Plan Notes.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 60% of the next $50 million of Available Cash but, if such Available Cash is less than $50 million, then 60% of the balance in Plan Notes or in net cash proceeds from any private
offerings of debt securities made in lieu of issuing Plan Notes, and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 34.43% of the remaining amount of any Available Cash and any Plan Notes up to the maximum amount of Plan Notes provided to be issued under the POR, or net cash proceeds from any
private offerings of debt securities made in lieu of issuing such Plan Notes.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The remaining amount of new common stock of reorganized Armstrong, Available Cash and Plan Notes or net cash proceeds from any private offerings of debt securities made in lieu of issuing Plan Notes will be
distributed to the Asbestos P I Trust.



Under the POR, unsecured creditors
whose claims (other than claims on debt securities) are less than $10 thousand or who elect to reduce their claims to $10 thousand will be treated as convenience creditors and will receive payment of 75% of their allowed claim amount in
cash (which payments will reduce the amount of Available Cash).



Under the POR,
the existing equity interests in AWI (including all of its outstanding shares of common stock) will be cancelled. The POR provides for the distribution of warrants to purchase shares of reorganized Armstrong (the Warrants) to the holders
of AWIs existing common stock. The terms of the Warrants are provided in an exhibit to the POR. The Warrants:



| |  | would permit the purchase of 5% of the common stock of reorganized Armstrong on a fully diluted basis, upon exercise of all the Warrants;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | would be exercisable at any time during the seven years after the effective date of the POR; and
| | - | ------------------------------------------------------------------------------------------------



| |  | would permit the purchase of shares at an exercise price of $37.50, which is equal to 125% of the $30.00 per share equity value of reorganized Armstrong, as agreed among the
financial advisers for AWI, the Asbestos Personal Injury Claimants Committee, the Unsecured Creditors Committee, and the Future Claimants Representative, as set forth in the Bankruptcy Court-approved disclosure statement for the
POR (as further described below).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Whether any value will be
realized from the Warrants will depend on whether the market value of reorganized Armstrongs new common stock reaches a value in excess of the exercise price of the Warrants during the period that they may be exercised.



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



AHIs shareholders were not entitled to vote on the POR. However, AHIs shareholders were sent the
Disclosure Statement and POR. If the POR is implemented, the only value that will be available to AHI shareholders is their ratable share of the Warrants available upon the contemplated dissolution of AHI. See AHIs Plan of Dissolution below.



Valuation of Consideration to be
Distributed under the POR (unaudited)



Based upon many assumptions (see
Disclosure Statement discussion above), to calculate the value of consideration to be distributed, AWI used $2.7 billion as the value of reorganized Armstrong. This is the mid-point of the range of estimated values of $2.4 billion and $3.0 billion
that was estimated by AWI and its financial advisors. AWIs estimated value of the consideration to be distributed under the POR to the Asbestos P I Trust, holders of allowed unsecured claims and AWIs existing common stock, is:



| |  | New common stock at $30 a share, which is the approximate mid-point of the range of estimated values of $24.66 and $35.30 per share, assuming a distribution of 56.4 million shares
of new common stock to holders of unsecured claims and the Asbestos P I Trust;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Plan Notes in the aggregate principal amount of $775 million, that are worth their face value;
| | - | ----------------------------------------------------------------------------------------------



| |  | Available Cash of approximately $350 million that AWI expects to have; and
| | - | --------------------------------------------------------------------------



| |  | Warrants with an estimated value of between $35 million and $40 million.
| | - | ------------------------------------------------------------------------



The total value of the consideration to be distributed to the Asbestos P I Trust, other than rights under asbestos non-product liability insurance policies, has been
estimated to be approximately $1.8 billion, and the total value of consideration to be distributed to holders of allowed unsecured claims (other than convenience claims) has been estimated to be approximately $0.9 billion. Based upon the estimated
value of the POR consideration, and upon AWIs estimate that unsecured claims allowed by the Bankruptcy Court (other than convenience claims) will total approximately $1.65 billion, AWI estimated that holders of allowed unsecured claims (other
than convenience claims) will receive a recovery having a value equal to approximately 59.5% of their allowed claims.



AHIs Plan of Dissolution, Winding Up and Distribution (Plan of Dissolution)



In connection with the implementation of the POR, the Warrants will be issued to AHI (or a
wholly-owned subsidiary of AHI). The Board of Directors of AHI has determined that it is not practicable for AHI to continue in operation as an on-going business owning the Warrants, which will then be AHIs only asset. Accordingly, the Board
of Directors of AHI approved and recommended to AHI shareholders the Plan of Dissolution, whereby AHI will voluntarily dissolve and wind up its affairs in accordance with Pennsylvania law and, subject to completion of AHIs winding up
(including the satisfaction of any liabilities of AHI), distribute any remaining Warrants to the shareholders. At a special meeting of AHI shareholders held on January 7, 2004, the Plan of Dissolution was approved by the AHI shareholders. The POR
provides that AWI will pay the costs and expenses incurred in connection with administering AHIs Plan of Dissolution.



Recent Developments and Next Steps in the Chapter 11 Process



In order for the POR to be confirmed, the U.S. District Court must issue findings of fact and conclusions of law in support of confirmation
of the POR, enter or affirm an order confirming the POR and issue the 524(g) injunction which is part of the POR. In certain other companies asbestos-related Chapter 11 cases, motions for recusal were filed in 2003 against U.S.
District Court Judge Alfred M. Wolin, who was jointly administering with the Bankruptcy Court the asbestos-related issues in the Chapter 11 cases of five companies, including AWI. As a result of these motions, Judge Wolin stayed proceedings in all
five cases before him, including AWIs Chapter 11 Case. Judge Wolin retired from the bench effective June 30, 2004. Judge Eduardo C. Robreno was assigned to the AWI case. Judge Robreno directed that a status report be filed with him by July 28,
2004. AWI is uncertain when confirmation of the POR will be considered by the U.S. District Court.



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Common Stock and Debt Securities



As a result of AWI filing the Plan of Reorganization on November 4, 2002, the New York Stock
Exchange stopped trading on the Exchange of the common stock of AHI (traded under the ticker symbol ACK) and two debt securities of AWI (traded under the ticker symbols AKK and ACK 08). AHIs common stock
resumed trading in the over-the-counter (OTC) Bulletin Board under the ticker symbol ACKHQ and one of AWIs debt securities resumed trading under the ticker symbol AKKWQ.



Bar Date for Filing Claims



The Bankruptcy Court established August 31, 2001 as the bar date for all claims against AWI
except for asbestos-related personal injury claims and certain other specified claims. A bar date is the date by which claims against AWI must be filed if the claimants wish to participate in any distribution in the Chapter 11 Case. A bar date for
asbestos-related personal injury claims (other than claims for contribution, indemnification, or subrogation) has been rendered unnecessary under the terms of the POR, which defers the filings of such claims until the Asbestos P I Trust is
established to administer such claims.



Approximately 4,800 proofs of claim
(including late-filed claims) totaling approximately $6.3 billion, alleging a right to payment from AWI, were filed with the Bankruptcy Court in response to the August 31, 2001 bar date. The disposition of these claims under the POR is discussed
below. AWI continues the process of investigating and resolving these claims. The Bankruptcy Court will ultimately determine the claims and related liability amounts that will be allowed as part of the Chapter 11 process if the parties cannot agree.



In its ongoing review of the filed claims, AWI to date has objected to
approximately 2,100 claims totaling $2.4 billion. The Bankruptcy Court disallowed these claims with prejudice.



During the first six months of 2003, AWI settled all of the approximately 460 remaining property damage claims that alleged damages of $800 million, for approximately $9 million. Payments to claimants were made during
the third quarter of 2003 and were funded by insurance.



Approximately 1,100
proofs of claim totaling approximately $1.5 billion are pending with the Bankruptcy Court that are associated with asbestos-related personal injury litigation, including direct personal injury claims, claims by co-defendants for contribution and
indemnification, and claims relating to AWIs participation in the Center for Claims Resolution. As stated above, the bar date of August 31, 2001 did not apply to asbestos-related personal injury claims other than claims for contribution,
indemnification, or subrogation. The POR contemplates that all AWI asbestos-related personal injury claims, including claims for contribution, indemnification, or subrogation, will be addressed in the future pursuant to the procedures relating to
the Asbestos P I Trust developed in connection with the POR. See further discussion regarding AWIs liability for asbestos-related matters in Note 12.



Approximately 1,200 claims totaling approximately $1.6 billion alleging a right to payment for financing, environmental, trade debt and other claims remain. For these
categories of claims, AWI has previously recorded approximately $1.6 billion in liabilities.



AWI has recorded liability amounts for claims that can be reasonably estimated and which it does not contest or believes are probable of being allowed by the Bankruptcy Court. The final value of all the claims that
will ultimately be allowed by the Bankruptcy Court is not known at this time. However, it is likely the value of the claims ultimately allowed by the Bankruptcy Court will be different than amounts presently recorded by AWI. This difference could be
material to AWIs financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and make changes to the recorded liability if and when it
is appropriate.



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Financing



AWI has a $75 million debtor-in-possession credit facility that currently is limited to issuances of letters of credit. This facility is
scheduled to mature on December 8, 2004. As of June 30, 2004, AWI had approximately $37.3 million in letters of credit, which were issued pursuant to the DIP Facility. As of June 30, 2004, AWI had $313.1 million of cash and cash equivalents,
excluding cash held by its non-debtor subsidiaries. AWI believes that cash on hand and generated from operations and dividends from its subsidiaries, together with subsidiary lines of credit and the DIP Facility, will be adequate to address its
foreseeable liquidity needs. Obligations under the DIP Facility, including reimbursement of draws under the letters of credit, if any, constitute superpriority administrative expense claims in the Chapter 11 Case.



Accounting Impact



AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization
under the Bankruptcy Code (SOP 90-7) provides financial reporting guidance for entities that are reorganizing under the Bankruptcy Code. This guidance is implemented in the accompanying consolidated financial statements.



Pursuant to SOP 90-7, AWI is required to segregate pre-Filing liabilities that
are subject to compromise and report them separately on the balance sheet. See Note 5 for detail of the liabilities subject to compromise at June 30, 2004 and December 31, 2003. Liabilities that may be affected by a plan of reorganization are
recorded at the expected amount of the allowed claims, even if they may be settled for lesser amounts. Substantially all of AWIs pre-Filing debt, now in default, is recorded at face value and is classified within liabilities subject to
compromise. Obligations of AWI subsidiaries not covered by the Filing remain classified on the consolidated balance sheet based upon maturity date. AWIs estimated liability for asbestos-related personal injury claims is also recorded in
liabilities subject to compromise. See Note 12 for further discussion of AWIs asbestos liability.



Additional pre-Filing claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.



SOP 90-7 also requires separate reporting of all revenues, expenses, realized gains and
losses, and provision for losses related to the Filing as Chapter 11 reorganization costs, net. Accordingly, AWI recorded the following Chapter 11 reorganization activities through June 30 of 2004 and 2003:



|                                                  |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   |      |  
|------------------------------------------------- |  | -------------------------- | ---- | - | ------------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                  |  | Three Months EndedJune 30, |      |   | Six Months EndedJune 30, |  
|                                                  |  | 2004                       |      |   | 2003                     |   |      | 2004 |  |   | 2003 |  
|Professional fees                                 |  | $                          | 2.7  |   |                          | $ | 6.9  |      |  | $ | 6.0  |   |  | $ | 12.0 |  
|Interest income, post-Filing                      |  |                            | (0.9 | ) |                          |   | (0.8 | )    |  |   | (1.7 | ) |  |   | (1.7 | )
|Reductions to pre-Filing liabilities              |  |                            |     |   |                          |   | (0.2 | )    |  |   |     |   |  |   | (0.5 | )
|Other expense directly related to bankruptcy, net |  |                            |     |   |                          |   |     |      |  |   |     |   |  |   | 0.1  |  
|                                                  |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   |      |  
|Total Chapter 11 reorganization costs, net        |  | $                          | 1.8  |   |                          | $ | 5.9  |      |  | $ | 4.3  |   |  | $ | 9.9  |  
|                                                  |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   |      |  



Professional fees represent legal and
financial advisory fees and expenses directly related to the Filing.



Interest
income is earned from short-term investments subsequent to the Filing.



Reductions to pre-Filing liabilities represent Bankruptcy Court approved settlements of prepetition liabilities.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



As a result of the Filing, realization of assets and liquidation of liabilities are subject to uncertainty. While
operating as a debtor-in-possession, AWI may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements.



If and when the POR is confirmed and made effective, reorganized AWIs condensed
consolidated financial statements will change materially in amounts and classifications through the implementation of the fresh start accounting rules of SOP 90-7.



Conclusion



Although the POR has been developed, implementation of the POR is subject to confirmation of the POR in accordance with the provisions of the Bankruptcy Code and
satisfaction after consummation of certain conditions, as provided by the POR. AWI is unable to predict when and if the POR will be confirmed. Therefore, the timing and terms of a resolution of the Chapter 11 Case remain uncertain.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 3. SEGMENT RESULTS



|                                  |  |                             |       |                           |   |       |  |      |         |  |   |        
|--------------------------------- |  | --------------------------- | ----- | ------------------------- | - | ----- |  | ---- | ------- |  | - | -------
|                                  |  | Three Months Ended June 30, |       | Six Months Ended June 30,
|                                  |  | 2004                        |       | 2003                      |   | 2004  |  | 2003
|Net sales to external customers   |  |                             |       |                           |   |       |  |      |         |  |   |        
|Resilient Flooring                |  | $                           | 321.9 |                           | $ | 308.3 |  | $    | 626.0   |  | $ | 595.0  
|Wood Flooring                     |  |                             | 214.1 |                           |   | 181.6 |  |      | 411.5   |  |   | 348.8  
|Textiles and Sports Flooring      |  |                             | 65.1  |                           |   | 67.1  |  |      | 127.4   |  |   | 129.1  
|Building Products                 |  |                             | 247.3 |                           |   | 216.7 |  |      | 477.3   |  |   | 423.8  
|Cabinets                          |  |                             | 55.1  |                           |   | 53.2  |  |      | 106.3   |  |   | 105.1  
|                                  |  |                             |       |                           |   |       |  |      |         |  |   |        
|Total sales to external customers |  | $                           | 903.5 |                           | $ | 826.9 |  | $    | 1,748.5 |  | $ | 1,601.8
|                                  |  |                             |       |                           |   |       |  |      |         |  |   |        



|                                           |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|------------------------------------------ |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                           |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                           |  | 2004                        |       |   | 2003                      |   |       | 2004 |  |   | 2003  |  
|Segment operating income/(loss)            |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Resilient Flooring                         |  | $                           | (39.5 | ) |                           | $ | 19.1  |      |  | $ | (23.4 | ) |  | $ | 36.7  |  
|Wood Flooring                              |  |                             | 21.1  |   |                           |   | 5.7   |      |  |   | 31.4  |   |  |   | 7.9   |  
|Textiles and Sports Flooring               |  |                             | (1.7  | ) |                           |   | (3.1  | )    |  |   | (3.6  | ) |  |   | (9.1  | )
|Building Products                          |  |                             | 38.4  |   |                           |   | 27.8  |      |  |   | 66.3  |   |  |   | 45.6  |  
|Cabinets                                   |  |                             | 1.5   |   |                           |   | (2.4  | )    |  |   | 2.1   |   |  |   | (6.0  | )
|All Other                                  |  |                             | 0.8   |   |                           |   | 0.5   |      |  |   | 1.3   |   |  |   | 0.9   |  
|                                           |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total segment operating income             |  |                             | 20.6  |   |                           |   | 47.6  |      |  |   | 74.1  |   |  |   | 76.0  |  
|Unallocated Corporate (expense)            |  |                             | (17.0 | ) |                           |   | (81.0 | )    |  |   | (28.9 | ) |  |   | (98.1 | )
|                                           |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total consolidated operating income/(loss) |  | $                           | 3.6   |   |                           | $ | (33.4 | )    |  | $ | 45.2  |   |  | $ | (22.1 | )
|                                           |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  



|                                |  |               |         |                   |   |        
|------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                |  | June 30, 2004 |         | December 31, 2003
|                                |  |              
|Segment assets                  |  |               |         |                   |   |        
|Resilient Flooring              |  | $             | 863.3   |                   | $ | 915.3  
|Wood Flooring                   |  |               | 614.2   |                   |   | 576.6  
|Textiles and Sports Flooring    |  |               | 212.3   |                   |   | 207.1  
|Building Products               |  |               | 568.4   |                   |   | 551.5  
|Cabinets                        |  |               | 100.7   |                   |   | 102.3  
|All Other                       |  |               | 20.3    |                   |   | 18.8   
|                                |  |               |         |                   |   |        
|Total segment assets            |  |               | 2,379.2 |                   |   | 2,371.6
|Assets not assigned to segments |  |               | 2,283.5 |                   |   | 2,276.2
|                                |  |               |         |                   |   |        
|Total consolidated assets       |  | $             | 4,662.7 |                   | $ | 4,647.8
|                                |  |               |         |                   |   |        



NOTE 4. INCOME TAX EXPENSE/(BENEFIT)



Tax expense of $13.6
million recorded in the second quarter represents the estimated effective tax rate for 2004 applied against quarterly pre-tax income of $59.1 million, which is the amount of income exclusive of the impact of the nontaxable $60 million goodwill
impairment. The resulting second quarter tax rate of 23% is lower than the statutory US Federal and state rate primarily because of special tax benefits recorded to reflect the overall favorable settlement of tax audits during the quarter.



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 5. LIABILITIES SUBJECT TO COMPROMISE



As a result of AWIs Chapter 11 filing (see Note 2), pursuant to SOP 90-7, AWI is
required to segregate prepetition liabilities that are subject to compromise and report them separately on the balance sheet. Liabilities that may be affected by a plan of reorganization are recorded at the amount of the expected allowed claims,
even if they may be settled for lesser amounts. Substantially all of AWIs prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of AHI subsidiaries not covered by
the Filing remain classified on the condensed consolidated balance sheet based upon maturity date. AWIs asbestos liability is also recorded in liabilities subject to compromise. See Note 2 for further discussion on how the Chapter 11 process
may address AWIs liabilities subject to compromise and Note 12 for further discussion of AWIs asbestos liability.



Liabilities subject to compromise at June 30, 2004 and December 31, 2003 are as follows:



|                                                |  |               |         |                   |   |        
|----------------------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                                |  | June 30, 2004 |         | December 31, 2003
|                                                |  |              
|Debt (at face value)(1)                         |  | $             | 1,388.6 |                   | $ | 1,388.6
|Asbestos-related liability                      |  |               | 3,190.6 |                   |   | 3,190.6
|Prepetition trade payables                      |  |               | 58.9    |                   |   | 58.9   
|Prepetition other payables and accrued interest |  |               | 66.3    |                   |   | 62.7   
|Amounts due to affiliates                       |  |               | 4.7     |                   |   | 4.7    
|ESOP loan guarantee                             |  |               | 157.7   |                   |   | 157.7  
|                                                |  |               |         |                   |   |        
|Total liabilities subject to compromise         |  | $             | 4,866.8 |                   | $ | 4,863.2
|                                                |  |               |         |                   |   |        



|(1) | In accordance with SOP 90-7, we did not record contractual interest expense on prepetition
debt after the Chapter 11 filing date. This unrecorded interest expense was $21.7 million and $43.4 million in the second quarter and first six months of 2004, respectively, and $25.0 million and $49.8 million in the second quarter and the first six
months of 2003, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Additional prepetition claims
(liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.



NOTE 6. INVENTORIES



|                             |  |               |       |   |                   |   |       |  
|---------------------------- |  | ------------- | ----- | - | ----------------- | - | ----- | -
|                             |  | June 30, 2004 |       |   | December 31, 2003 |  
|Finished goods               |  | $             | 338.2 |   |                   | $ | 330.7 |  
|Goods in process             |  |               | 46.2  |   |                   |   | 40.6  |  
|Raw materials and supplies   |  |               | 177.8 |   |                   |   | 165.3 |  
|Less LIFO and other reserves |  |               | (86.3 | ) |                   |   | (82.2 | )
|                             |  |               |       |   |                   |   |       |  
|Total inventories, net       |  | $             | 475.9 |   |                   | $ | 454.4 |  
|                             |  |               |       |   |                   |   |       |  



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 7. GOODWILL AND INTANGIBLE ASSETS



As of January 1, 2004, we had goodwill of approximately $244 million. Approximately $107
million of this consolidated goodwill amount was attributable to our European resilient flooring reporting unit, which comprises wholly-owned and majority-owned subsidiaries and is reported within the Resilient Flooring reporting segment. Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at least annually. Based on an assessment of financial projections incorporated in our annual strategic plan
process which was prepared in the second quarter of 2004, we recently concluded that an indication of impairment exists for the European resilient flooring goodwill. Continuing price declines and volume shortfalls related to our European resilient
flooring products are causing significant operating losses, and we have revised our projections accordingly. We calculated a preliminary estimate of the European resilient flooring reporting units fair value using discounted cash flows. Based
on this preliminary fair value calculation, we recorded a non-cash goodwill impairment loss of $60 million in the second quarter of 2004. During the second half of 2004, we will complete the valuation process for the significant assets and
liabilities of the European resilient flooring business. Any adjustment to the estimated impairment loss based on the completion of these valuations could be material to our results of operations and will be recorded during the second half of 2004.



The following table represents the changes in goodwill for the first six
months of 2004.



|                            |  |                 |       |                     |   |      |             |  |   |               |   |  |   |      
|--------------------------- |  | --------------- | ----- | ------------------- | - | ---- | ----------- |  | - | ------------- | - |  | - | -----
|                            |  | January 1, 2004 |       | Adjustments, net(1) |   |      | Impairments |  |   | June 30, 2004
|Goodwill by segment         |  |                 |       |                     |   |      |             |  |   |               |   |  |   |      
|Resilient Flooring          |  | $               | 107.1 |                     | $ | (2.8 | )           |  | $ | (60.0         | ) |  | $ | 44.3 
|Wood Flooring               |  |                 | 110.4 |                     |   |      |             |  |   |               |   |  |   | 110.4
|Building Products           |  |                 | 14.0  |                     |   | (0.3 | )           |  |   |               |   |  |   | 13.7 
|Cabinets                    |  |                 | 12.6  |                     |   |      |             |  |   |               |   |  |   | 12.6 
|                            |  |                 |       |                     |   |      |             |  |   |               |   |  |   |      
|Total consolidated goodwill |  | $               | 244.1 |                     | $ | (3.1 | )           |  | $ | (60.0         | ) |  | $ | 181.0
|                            |  |                 |       |                     |   |      |             |  |   |               |   |  |   |      



|(1) | Primarily consists of the effects of foreign exchange.
|--- | ------------------------------------------------------



The following table details amounts related to AHIs intangible assets as of June 30, 2004 and December 31, 2003.



|                               |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|------------------------------ |  | -------------------- | ----- | ----------------------- | - | -------------------- |  | ----------------------- | ----- |  | - | ----
|                               |  | June 30, 2004        |       | December 31, 2003      
|                               |  | Gross CarryingAmount |       | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|Amortized intangible assets    |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Computer software              |  | $                    | 107.5 |                         | $ | 64.1                 |  | $                       | 104.1 |  | $ | 57.7
|Land use rights and other      |  |                      | 4.4   |                         |   | 1.0                  |  |                         | 4.4   |  |   | 0.9 
|                               |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Total                          |  | $                    | 111.9 |                         | $ | 65.1                 |  | $                       | 108.5 |  | $ | 58.6
|                               |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Unamortized intangible assets  |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Trademarks and brand names     |  | $                    | 29.2  |                         |   |                      |  | $                       | 29.1  |  |   |     
|                               |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|Other intangible assets, gross |  | $                    | 141.1 |                         |   |                      |  | $                       | 137.6 |  |   |     
|                               |  |                      |       |                         |   |                      |  |                         |       |  |   |     



|                                       |  |   |    
|-------------------------------------- |  | - | ---
|Aggregate Amortization Expense         |  |   |    
|For the six months ended June 30, 2004 |  | $ | 7.8
|For the six months ended June 30, 2003 |  | $ | 7.9



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 8. RESTRUCTURING AND OTHER ACTIONS



Net restructuring charges of $1.1 million recorded in the second quarter of 2004 included
charges of $1.6 million and reversals of $0.5 million. The charges of $1.6 million related to estimated severance and related costs for approximately 130 employees in the Building Products manufacturing location in Hoogezand, The Netherlands. The
closure of this facility is estimated to be complete by the first quarter of 2005, subject to positive advice from the local works council. The production will be transferred to another Building Products location in Münster, Germany and will
result in a net reduction of approximately 72 positions. The $0.5 million of reversals comprises certain severance accruals that were no longer necessary in the remaining accruals from the 2003 charges in the Textiles and Sports Flooring ($0.2
million) and Resilient Flooring ($0.3 million) segments.



Net restructuring
charges of $2.0 million recorded in the first quarter of 2004 included charges of $2.4 million and reversals of $0.4 million. Substantially all of the $2.4 million charges related to estimated severance benefits and related costs for the Building
Products manufacturing location in Hoogezand, The Netherlands described above. The $0.4 million of reversals comprised certain severance accruals that were no longer necessary in the remaining accruals from the 2003 and 2002 charges in the Textiles
and Sports Flooring ($0.2 million) and Resilient Flooring ($0.2 million) segments.



A $1.3 million restructuring charge was recorded in the second quarter of 2003. The charge related primarily to severance benefits for approximately 11 employees in the Textiles and Sports Flooring ($0.7 million) and Resilient Flooring
($0.6 million) segments, as part of the continuing restructuring plan to consolidate certain functions in the European flooring business. In addition, $0.4 million of the remaining accrual from the second quarter 2002 charge in the Resilient
Flooring segment was reversed, comprising certain severance accruals that were no longer necessary.



A $3.2 million restructuring charge was recorded in the first quarter of 2003. The charge related to severance benefits for approximately 52 employees in the Textiles and Sports Flooring ($2.3 million) and Resilient
Flooring ($0.9 million) segments, as part of the restructuring plan to consolidate certain functions in the European flooring business.



The following table summarizes activity in the reorganization and restructuring accruals for the first six months of 2004 and 2003.



|     |  |                  |      |              |   |      |         |  |           |     |  |       |      |               |  |   |     |  |   |     
|---- |  | ---------------- | ---- | ------------ | - | ---- | ------- |  | --------- | --- |  | ----- | ---- | ------------- |  | - | --- |  | - | ----
|     |  | BeginningBalance |      | CashPayments |   |      | Charges |  | Reversals |     |  | Other |      | EndingBalance
|2004 |  | $                | 10.0 |              | $ | (1.6 | )       |  | $         | 4.0 |  | $     | (0.9 | )             |  | $ | 0.1 |  | $ | 11.6
|2003 |  |                  | 9.1  |              |   | (2.1 | )       |  |           | 4.5 |  |       | (0.4 | )             |  |   | 0.4 |  |   | 11.5



The amount in other for
2004 and 2003 is primarily related to foreign currency translation.



Substantially all of the remaining balance of the restructuring accrual as of June 30, 2004 relates to a noncancelable operating lease, which extends through 2017, and severance for terminated employees with extended payouts, the majority
of which will be paid by 2005.



49



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 9. PENSIONS



Following are the components of net periodic benefit costs:



|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|--------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                              |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                              |  | 2004                        |       |   | 2003                      |   |       | 2004 |  |   | 2003  |  
|U.S. defined-benefit plans                    |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Pension Benefits                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Service cost of benefits earned               |  | $                           | 5.8   |   |                           | $ | 5.5   |      |  | $ | 11.6  |   |  | $ | 10.9  |  
|Interest cost on projected benefit obligation |  |                             | 22.9  |   |                           |   | 23.0  |      |  |   | 45.7  |   |  |   | 45.9  |  
|Expected return on plan assets                |  |                             | (37.0 | ) |                           |   | (36.1 | )    |  |   | (73.9 | ) |  |   | (72.2 | )
|Amortization of prior service cost            |  |                             | 4.4   |   |                           |   | 4.4   |      |  |   | 8.7   |   |  |   | 8.9   |  
|Recognized net actuarial loss                 |  |                             | 0.4   |   |                           |   | 0.3   |      |  |   | 0.8   |   |  |   | 0.7   |  
|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Net periodic pension (credit)                 |  | $                           | (3.5  | ) |                           | $ | (2.9  | )    |  | $ | (7.1  | ) |  | $ | (5.8  | )
|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Retiree Health and Life Insurance Benefits    |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Service cost of benefits earned               |  | $                           | 0.6   |   |                           | $ | 0.9   |      |  | $ | 1.3   |   |  | $ | 1.7   |  
|Interest cost on projected benefit obligation |  |                             | 5.5   |   |                           |   | 6.5   |      |  |   | 11.0  |   |  |   | 13.1  |  
|Amortization of prior service benefit         |  |                             | (1.4  | ) |                           |   | (1.3  | )    |  |   | (2.8  | ) |  |   | (2.6  | )
|Recognized net actuarial loss                 |  |                             | 2.5   |   |                           |   | 3.1   |      |  |   | 4.9   |   |  |   | 6.2   |  
|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Net periodic postretirement benefit cost      |  | $                           | 7.2   |   |                           | $ | 9.2   |      |  | $ | 14.4  |   |  | $ | 18.4  |  
|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|                                              |  |                            
|                                              |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                              |  | 2004                        |       |   | 2003                      |   |       | 2004 |  |   | 2003  |  
|Non-U.S. defined-benefit plans                |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Pension Benefits                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Service cost of benefits earned               |  | $                           | 2.2   |   |                           | $ | 2.2   |      |  | $ | 4.7   |   |  | $ | 4.1   |  
|Interest cost on projected benefit obligation |  |                             | 5.2   |   |                           |   | 5.1   |      |  |   | 10.5  |   |  |   | 9.5   |  
|Expected return on plan assets                |  |                             | (3.6  | ) |                           |   | (3.4  | )    |  |   | (7.3  | ) |  |   | (6.3  | )
|Amortization of transition obligation         |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   | 0.1   |  
|Amortization of prior service cost            |  |                             |      |   |                           |   | 0.2   |      |  |   | 0.1   |   |  |   | 0.3   |  
|Recognized net actuarial loss                 |  |                             | 0.1   |   |                           |   | 0.1   |      |  |   | 0.2   |   |  |   | 0.2   |  
|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Net periodic pension cost                     |  | $                           | 3.9   |   |                           | $ | 4.2   |      |  | $ | 8.2   |   |  | $ | 7.9   |  
|                                              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  



Medicare Act



On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of
2003 (The Act) became law in the United States. The Act provides employers currently sponsoring prescription drug programs for Medicare-eligible participants with a range of options for coordinating with the new government-sponsored
program. These options include supplementing the government program on a secondary payor basis or accepting a direct subsidy from the government to support a portion of the cost of the employers program.



Pursuant to guidance issued in the second quarter of 2004 by the FASB, we elected to begin
recording the effect of the Act in the second quarter. The Act affects both operating income and balance sheet liabilities over time. Since the Act is effective retroactive to January 1, 2004 and the total year benefit is expected to be $7 million,
operating income for the six months ended June 30, 2004 benefited by $3.5 million. The $3.5 million benefit was evenly apportioned between the first and second quarters and was recorded in cost of goods sold ($1.9 million) and selling, general and
administrative expenses (SG&A)($1.6 million). The remaining amount of the $7 million annual benefit will be recorded in the third and fourth quarters. The reduction in the accumulated postretirement benefit obligation related to the
Medicare benefit is expected to be $52.4 million.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



NOTE 10. PRODUCT WARRANTIES



We provide direct customer and end-user warranties for our products. These warranties cover
manufacturing defects that would prevent the product from performing in line with its intended and marketed use. Generally, the terms of these warranties range up to 25 years and provide for the repair or replacement of the defective product. We
collect and analyze warranty claims data with a focus on the historical amount of claims, the products involved, the amount of time between the warranty claims and their respective sales and the amount of current sales. The following table
illustrates the activity for product warranties for the first six months of 2004 and 2003:



|                                        |  |      |       |   |      |   |       |  
|--------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                        |  | 2004 |       |   | 2003 |  
|Balance at January 1                    |  | $    | 25.5  |   |      | $ | 22.3  |  
|Reductions for payments                 |  |      | (18.9 | ) |      |   | (20.9 | )
|Current year warranty accruals          |  |      | 18.7  |   |      |   | 21.7  |  
|Preexisting warranty accrual changes    |  |      | (0.6  | ) |      |   | (0.1  | )
|Effects of foreign exchange translation |  |      | (0.2  | ) |      |   | 0.7   |  
|                                        |  |      |       |   |      |   |       |  
|Balance at June 30                      |  | $    | 24.5  |   |      | $ | 23.7  |  
|                                        |  |      |       |   |      |   |       |  



NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION



|                       |  |                          |      |      |   |     
|---------------------- |  | ------------------------ | ---- | ---- | - | ----
|                       |  | Six Months EndedJune 30,
|                       |  | 2004                     |      | 2003
|Interest paid          |  | $                        | 1.3  |      | $ | 1.7 
|Income taxes paid, net |  | $                        | 49.4 |      | $ | 10.6



The increase in income taxes paid
related primarily to estimated federal tax payments made in the second quarter of 2004.



NOTE 12. LITIGATION AND RELATED MATTERS

ASBESTOS-RELATED LITIGATION



Prior to December 6, 2000, AWI, the major operating subsidiary of AHI, had been named as a defendant in personal injury cases and property damage cases related to
asbestos-containing products. On December 6, 2000, AWI filed a voluntary petition for relief (the Filing) under Chapter 11 of the U.S. Bankruptcy Code to use the court-supervised reorganization process to achieve a resolution of
AWIs asbestos-related liability.



Two of AWIs domestic subsidiaries
also commenced Chapter 11 proceedings at the time of the Filing. AHI and all of AWIs other direct and indirect subsidiaries, including Armstrong Wood Products Inc. (formerly Triangle Pacific Corp.), WAVE (Armstrongs ceiling grid systems
joint venture with Worthington Industries, Inc.), Armstrong Canada and Armstrong DLW AG were not a part of the Filing and accordingly the liabilities, including asbestos-related liability if any, of such companies arising out of their own activities
will not be resolved in AWIs Chapter 11 Case except for any asbestos-related liability that also relates, directly or indirectly, to the pre-Filing activities of AWI.



Asbestos-Related Personal Injury Claims



Prior to the Filing, AWI was a member of the Center for Claims Resolution (the
CCR), which handled the defense and settlement of asbestos-related personal injury claims on behalf of its members. The CCR pursued broad-based settlements of asbestos-related personal injury claims under the Strategic Settlement Program
(SSP) and had reached agreements with law firms that covered approximately 130,000 claims that named AWI as a defendant.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Due to the Filing, holders of asbestos-related personal injury claims are stayed from continuing to prosecute pending
litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments to the CCR with respect to asbestos-related personal injury claims, including payments pursuant to the outstanding SSP agreements. A creditors
committee representing the interests of asbestos-related personal injury claimants and an individual representing the interests of future claimants have been appointed in the Chapter 11 Case. AWIs present and future asbestos-related liability
will be addressed in its Chapter 11 Case. See Note 2 regarding AWIs Chapter 11 proceeding.



During 2003, AWI and the other parties in its Chapter 11 Case reached agreement on a plan of reorganization that addresses how all of AWIs pre-Filing liabilities are to be settled. Several amendments to the plan
of reorganization were filed, culminating in the Fourth Amended Plan of Reorganization filed with the Bankruptcy Court on May 23, 2003, which was modified by modifications filed with the Bankruptcy Court on October 17, 2003 and November 10, 2003,
and is referred to in this report as the POR. A principal feature of the POR is the creation of a trust (the Asbestos P I Trust), pursuant to section 524(g) of the Bankruptcy Code, for the purpose of addressing AWIs
personal injury (including wrongful death) asbestos-related liability. Pursuant to the POR, all present and future asbestos-related personal injury claims against AWI, including contribution claims of co-defendants, arising directly or indirectly
out of AWIs pre-Filing use of or other activities involving asbestos will be channeled to the Asbestos P I Trust. In accordance with the 524(g) injunction to be issued by the District Court in connection with the confirmation of the POR,
various entities will be protected from such present and future asbestos-related personal injury claims. These entities include, among others, AWI as it will be reorganized, AHI, AWIs subsidiaries and other affiliates (as defined in the POR),
and their respective officers and directors. Upon emergence from Chapter 11, AWI will not have any responsibility for these claims (including claims against AWI based solely on its ownership of a subsidiary or other affiliate), nor will it
participate in their resolution.



However, although AWIs domestic and
foreign subsidiaries and other affiliates will be protected parties, asbestos-related personal injury claims against them will be channeled to the Asbestos P I Trust only to the extent such claims directly or indirectly relate to the manufacturing,
installation, distribution or other activities of AWI or are based solely on AWIs ownership of the subsidiaries or other affiliates (as distinguished from independent activities of the subsidiaries or affiliates). Currently, three
asbestos-related personal injury litigations against subsidiaries of AWI allegedly arising out of such independent activities are pending.



These claims will not be channeled to the Asbestos P I Trust under the POR inasmuch as they do not involve activities of AWI. The cases have multiple defendants. The
subsidiaries deny liability and are aggressively defending the matters. AWI has not recorded any liability for these matters. Management does not expect that any sum that may have to be paid in connection with these matters will be material to
Armstrong.



In addition, workers compensation claims brought against AWI
or its subsidiaries or other affiliates will not be channeled to the Asbestos P I Trust and will remain subject to the workers compensation process. Historically, workers compensation claims against AWI and its subsidiaries have not been
significant in number or amount and AWI has continued to honor its obligations with respect to such claims during the Chapter 11 Case. Workers compensation law provides that the employer is responsible for evaluation, medical treatment and
lost wages as a result of a job-related injury. Currently, AWI has only four pending workers compensation claims and its UK subsidiary has four employer liability claims involving alleged asbestos exposure.



There also is uncertainty as to proceedings, if any, brought in certain foreign jurisdictions
with respect to the effect of the 524(g) injunction in precluding the assertion in such jurisdictions of asbestos-related personal injury claims, proceedings related thereto or the enforcement of judgments rendered in such proceedings.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Management believes that neither AWI nor any of its subsidiaries or other affiliates is subject to any
asbestos-related personal injury claims that would not be channeled to the Asbestos P I Trust and that are of a magnitude that, individually or collectively, would be material to reorganized Armstrong.



Before the POR may be implemented, it must be confirmed by order of the Bankruptcy Court and
the U.S. District Court. In addition, consummation of the POR is subject to the satisfaction after confirmation of certain conditions, as provided by the POR. See Note 2 for discussion of recent developments and the next steps in AWIs Chapter
11 process. AWI is unable to predict when and if the POR will be confirmed and implemented. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded
asbestos-related liability are possible and could be material to AWIs financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and
make changes to the recorded liability if and when it is appropriate.



Insurance Recovery Proceedings



A
substantial portion of AWIs primary and remaining excess insurance asset is nonproducts (general liability) insurance for personal injury claims. AWI has entered into settlements with a number of the carriers resolving its coverage issues.
However, an alternative dispute resolution (ADR) procedure was commenced against certain carriers to determine the percentage of resolved and unresolved claims that are nonproducts claims, to establish the entitlement to such coverage
and to determine whether and how much reinstatement of prematurely exhausted products hazard insurance is warranted. The nonproducts coverage potentially available is substantial and includes defense costs in addition to limits.



During 1999, AWI received preliminary decisions in the initial phases of the trial proceeding
of the ADR, which were generally favorable to AWI on a number of issues related to insurance coverage. However, during the first quarter of 2001, a new trial judge was selected for the ADR. The new trial judge conducted hearings in 2001 and
determined not to rehear matters decided by the previous judge. In the first quarter of 2002, the trial judge concluded the ADR trial proceeding with findings in favor of AWI on substantially all key issues. Liberty Mutual, the only insurer that is
still a party to the ADR, appealed that final judgment. Appellate argument was held on March 11, 2003. On July 30, 2003, the appellate arbitrators ruled that AWIs claims against certain Liberty Mutual policies were barred by the statute of
limitations. The ruling did not address the merits of any of the other issues Liberty Mutual raised in its appeal. Based on that unfavorable ruling, AWI concluded that insurance assets of $73 million were no longer probable of recovery. AWI was also
ordered to reimburse Liberty Mutual for certain costs and administration fees that Liberty Mutual incurred during the ADR. The amount of these costs and fees is in dispute and AWI is currently unable to estimate the amount. Based upon an AWI
request, the appellate panel held a rehearing on November 21, 2003. In January 2004, the appellate panel upheld its initial ruling. On February 4, 2004, AWI filed a motion in the U.S. District Court for the Eastern District of Pennsylvania to vacate
the rulings of the appellate panel.



In July 2002, AWI filed a lawsuit against
Liberty Mutual in the U.S. District Court for the Eastern District of Pennsylvania seeking, among other things, a declaratory judgment with respect to certain policy issues not subject to binding ADR. The U.S. District Court has not yet set a
schedule to hear this matter.



On June 13, 2003, the New Hampshire Insurance
Department placed The Home Insurance Company (Home) under an order of liquidation. Less than $10 million of AWIs recorded insurance asset is based on policies with Home, which management believes is probable of recovery. AWI filed
a proof of claim against Home during June 2004. It is uncertain when AWI will receive proceeds from Home under these insurance policies.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Insurance Asset



An insurance asset in respect of asbestos claims in the amount of $98.6 million was recorded
as of June 30, 2004 compared to $103.1 million recorded as of December 31, 2003. The total amount recorded reflects AWIs belief that insurance proceeds will be recovered in this amount, based upon AWIs success in insurance recoveries,
settlement agreements that provide such coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. Such insurance, in our opinion, is either available through settlement or probable of recovery through negotiation or
litigation. Depending on further progress of the ADR, activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, the final determination of coverage shared with ACandS (the former AWI
insulation contracting subsidiary that was sold in August 1969 and which filed for relief under Chapter 11 of the Bankruptcy Code in September 2002) and the financial condition of the insurers, AWI may revise its estimate of probable insurance
recoveries. Approximately $79 million of the $98.6 million asset is determined from agreed coverage in place. Of the $98.6 million, $11.5 million has been recorded as a current asset as of June 30, 2004 reflecting managements estimate of the
minimum insurance payments to be received in the next 12 months.



Many
uncertainties remain in the insurance recovery process, therefore, AWI did not increase the estimated insurance recovery asset in the second quarter of 2004. During the second quarter of 2003, $9 million of an insurance asset was recorded for
asbestos property damage claims based on agreements reached during the first half of 2003.



Cash Flow Impact



As a result of the Chapter 11 Filing, AWI has not made any payments for asbestos-related personal injury claims since the fourth quarter of 2000. AWI received
asbestos-related insurance recoveries of $4.5 million and $14.0 million, respectively, during the first six months of 2004 and 2003. During the pendency of the Chapter 11 Case, AWI does not expect to make any further cash payments for
asbestos-related claims, but AWI expects to continue to receive insurance proceeds under the terms of various settlement agreements. Management estimates that the timing of future cash recoveries of the recorded asset may extend beyond 10 years.



Potential Legislation



On April 6, 2004, S.2290 (Fairness in Asbestos Injury Resolution Act of 2004) was introduced
in the Senate. On April 22, 2004, proponents of the bill failed to obtain sufficient votes to pass a cloture motion to bring the bill to the Senate floor, which effectively stopped the bill from being considered. Since April 22, the Senate
leadership has been involved in negotiations to explore whether a compromise on the merits of the bill can be reached; to date there has been no resolution. There is uncertainty as to whether the current or any other proposal will become law, and
what impact there might be on AWIs asbestos liability and/or AWIs Chapter 11 Case. Prior efforts to enact asbestos legislation have not been successful.



Conclusion



Many uncertainties continue to exist about the matters impacting AWIs asbestos-related liability and insurance asset. These uncertainties include when and if the
POR will be confirmed by the U.S. District Court, the impact of any potential legislation, and the financial condition of AWIs insurance carriers.



Additionally, if the POR is confirmed, AWI is unable to predict when it will be implemented. Therefore, the timing and terms of resolution of the Chapter 11 Case remain
uncertain. As long as this uncertainty exists, future changes to the recorded liability and insurance asset are possible and could be material to AWIs financial position and the results of its operations. Management will continue to review the
recorded liability and insurance asset in light of future developments in the Chapter 11 Case and make changes to the recorded amounts if and when it is appropriate.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



ENVIRONMENTAL MATTERS

Environmental Expenditures



Most of our manufacturing and certain of our research facilities are affected by various federal, state and local environmental requirements relating to the discharge of
materials or the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at our operating facilities. As a result of continuous changes in regulatory requirements, we cannot predict
with certainty future expenditures associated with compliance with environmental requirements.



Environmental Remediation



Summary



We are involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), and similar state Superfund laws at approximately 26 sites. In most
cases, we are one of many potentially responsible parties (PRPs) which have potential liability for the required investigation and remediation of each site and which, in some cases, have agreed to jointly fund that required investigation
and remediation. With regard to some sites, however, we dispute the liability, the proposed remedy or the proposed cost allocation among the PRPs. We may have rights of contribution or reimbursement from other parties or coverage under applicable
insurance policies.



We have also been remediating environmental contamination
resulting from past industrial activity at certain of our former plant sites. Estimates of our future environmental liability at the Superfund sites and current or former plant sites are based on evaluations of currently available facts regarding
each individual site and consider factors such as our activities in conjunction with the site, existing technology, presently enacted laws and regulations and prior company experience in remediating contaminated sites. Although current law imposes
joint and several liability on all parties at Superfund sites, our contribution to the remediation of these sites is expected to be limited by the number of other companies also identified as potentially liable for site remediation. As a result, our
estimated liability reflects only our expected share. In determining the probability of contribution, we consider the solvency of the parties, whether liability is being disputed, the terms of any existing agreements and experience with similar
matters. Additionally, the Chapter 11 Case also may affect the ultimate amount of such contributions.



Effects of Chapter 11



Certain of
AWIs environmental liabilities are subject to discharge through its Chapter 11 Case while others are not. AWIs payments and remediation work on such sites for which AWI is a PRP is under review in light of the Chapter 11 Filing. The bar
date for claims from the United States Environmental Protection Agency (EPA) expired during the third quarter of 2003. AWI received an unliquidated proof of claim from the EPA. Those environmental obligations that AWI has with respect to
property that it owns or operates are likely to be unaffected by the Chapter 11 Case. Therefore, AWI will be required to continue meeting its on-going environmental compliance obligations at the properties that AWI owns or operates. AWI will also be
required to address the effects of any contamination at those sites, even if the contamination predated Chapter 11 Filing. In addition, AWI may be obligated to remedy the off-site impact of activities that occurred on the properties it owns and
operates.



Monetary claims with respect to properties that AWI does not own or
operate (such as formerly owned sites, or landfills to which AWIs waste was taken) may be discharged in AWIs Chapter 11 Case. Accordingly, claims brought by the federal or a state agency alleging that AWI should reimburse the claimant
for money that it spent cleaning up a site which AWI does not own or operate would be subject to discharge, provided the claimant received proper notice of the bankruptcy and bar date. The same would be true for monetary claims by private parties,
such as other PRPs with respect to multiple party sites. Under the POR, the Superfund sites at which AWI is alleged to be a PRP are being treated as unsecured liabilities subject to compromise. Other Superfund sites relate to entities that are not
part of AWIs Chapter 11 Case and therefore will not be discharged.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



In addition to the right to sue for reimbursement of the money it spends, CERCLA also gives the federal government
the right to sue for an injunction compelling a defendant to perform a cleanup. Several state statutes give similar injunctive rights to those States. Bankruptcy law is unsettled as to whether these injunctive rights are dischargeable or not. Thus,
according to some cases, while a governmental agencys right to require AWI to reimburse it for the costs of cleaning up a site may be dischargeable, the same government agencys right to compel us to spend our money cleaning up the same
site may not be, even though the financial impact to AWI would be the same in both instances.



AWIs strategy has been to try to resolve as many of its environmental liabilities through its Chapter 11 Case as possible. AWI has been negotiating with the Department of Justice and the EPA to reach an
environmental settlement on approximately 30 sites. AWI has asked the federal government to agree, as it did in other settlements with debtors in their bankruptcies, to covenant not to sue us for either monetary or injunctive relief, in exchange for
an allowed claim amount in the bankruptcy with respect to known claims concerning sites that AWI does not own or operate. Under the proposed settlement, AWI would have contribution protection under CERCLA with respect to private party claims. In
addition, AWI would have the benefit of the discharge as to monetary claims. At this point, the parties are still in the process of negotiating a settlement.



If no settlement is reached, AWI anticipates that it will ask the Bankruptcy Court to determine the amount of the EPA proof of claim and grant a discharge. At that time,
the government may seek to have the amount of its claim determined as the total cost of cleanup under a theory of joint and several liability, not just AWIs share. As discussed above, although the governments right to monetary relief is
subject to discharge, there is uncertainty in the law as to whether the governments right to injunctive relief would also be subject to discharge.



Specific Events



In 2001, the EPA notified AWI that it may be a PRP at the Peterson Puritan site. However, AWI did not learn that the EPA may consider it a substantial contributor of waste to the site until July 2003. At that time,
the EPA notified AWI of the EPAs estimate of the sites future cleanup costs, with its assessment of AWIs share of the costs being a range of $17.8 million to $26.2 million. Subsequently, AWI presented information to the EPA
indicating that AWIs share should be much lower. Presently, the parties are continuing to negotiate. The EPA has not initiated any formal proceedings against AWI with respect to this site, other than sending information requests to AWI and
filing a proof of claim in AWIs Chapter 11 Case. AWI continues to review this matter but disputes the assessment. As discussed above (Effects of Chapter 11), management is currently in discussions with the Department of Justice and the
EPA to reach an environmental settlement, which may resolve the proof of claim against AWI, including this site.



AWI is subject to a unilateral order by the Oregon Department of Environmental Quality (DEQ) to conduct a remedial investigation and feasibility study and any
necessary remedial design and action at its St. Helens, Oregon facility, as well as the adjacent Scappoose Bay. AWI has denied liability for Scappoose Bay, but has cooperated with the DEQ regarding its owned property. Other potentially responsible
parties who are not yet subject to orders by the DEQ include former site owners Owens Corning (OC) and Kaiser Gypsum Company, Inc. (Kaiser). AWI has entered into an agreement with Kaiser for the sharing of costs and
responsibilities with respect to the remedial investigation, feasibility study and remedy selection at the site. OC has entered into a settlement with the DEQ. Pursuant to the settlement, OC has made a lump sum payment to the DEQ in exchange for
contribution protection (including protection against common law and statutory contribution claims by AWI against OC) and a covenant not to sue. AWI has negotiated with the DEQ as to how these funds will be made available for the investigation and
remediation of the site. AWI has recorded an environmental liability with respect to the investigation and feasibility study at its St. Helens facility, but not for Scappoose Bay because AWI continues to dispute responsibility for
contamination of Scappoose Bay.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



Summary of Financial Position



Liabilities of $25.3 million and $21.2 million at June 30, 2004 and December 31, 2003, respectively, were for potential environmental
liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made. The majority of this increase relates to developments in the Peterson Puritan site described in Specific Events
above. Where existing data is sufficient to estimate the liability, that estimate has been used; where only a range of probable liabilities is available and no amount within that range is more likely than any other, the lower end of the range has
been used. As assessments and remediation activities progress at each site, these liabilities are reviewed to reflect additional information as it becomes available. Due to the Chapter 11 Filing, $16.3 million of the June 30, 2004 and $12.8 million
of the December 31, 2003 environmental liabilities are classified as prepetition liabilities subject to compromise. As a general rule, the Chapter 11 process does not preserve company assets for such prepetition liabilities.



The estimated liabilities above do not take into account any claims for recoveries from
insurance or third parties. Such recoveries, where probable, have been recorded as an asset in the condensed consolidated financial statements and are either available through settlement or anticipated to be recovered through negotiation or
litigation. The amount of the recorded asset for estimated recoveries was $2.4 million and $2.5 million at June 30, 2004 and December 31, 2003, respectively.



Actual costs to be incurred at identified sites may vary from our estimates. Based on our current knowledge of the identified sites, we believe that any sum we may have
to pay in connection with environmental matters in excess of the amounts noted above would not have a material adverse effect on our financial condition, or liquidity, although the recording of future costs may be material to earnings in such future
period.



PATENT INFRINGEMENT CLAIMS



We are a defendant in two related lawsuits claiming patent infringement
related to some of our laminate products. The plaintiffs have claimed unspecified monetary damages. We are being defended and indemnified by our supplier for all costs and potential damages related to the litigation.



FORMER EMPLOYEES CLAIM



Former Armstrong employees that were separated from the company in two business divestitures
in 2000 brought two purported class actions against the Retirement Committee of AWI, certain current and former members of the Retirement Committee, the Retirement Savings and Stock Ownership Plan (RSSOP), AHI and the trustee bank of the RSSOP.
Plaintiffs alleged breach of Employee Retirement Income Security Act (ERISA) fiduciary duties and other violations of ERISA pertaining to losses in their RSSOP accounts, which were invested in Armstrong common stock.



An agreement was reached to settle this matter. Contributors to the settlement were AWI, its
insurer and the trustee bank of the RSSOP. The full amount of the settlement was allocated in December 2003 among approximately 370 former employees. AWIs portion of the settlement is $1.0 million, which will be treated as convenience claims
in the Chapter 11 Case. The settlement was approved by the Bankruptcy Court on March 31, 2003 and by the United States District Court (Eastern District of PA) on June 16, 2003. Based upon the Bankruptcy Courts approval of the settlement, AWI
recorded a $1.0 million charge in the first quarter of 2003 as an other non-operating expense.



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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)



DEPARTMENT OF LABOR SETTLEMENT



Subsequent to an audit by the United States Department of Labor (DOL), we were
informed that the DOL was challenging the validity of the use of certain contributions, in the approximate aggregate amount of $33.4 million, to fund debt payments made by the Armstrong Employee Stock Ownership Plan (ESOP), as provided
for by that plan. We reached a settlement with the DOL to resolve this matter with a funding to the ESOP of $1.5 million, which was distributed to plan participants in accordance with terms of the agreement in February 2004. Insurance and third
parties funded $0.9 million of the settlement. Both the accrual of $1.5 million expense and $0.9 million insurance receivable were recorded in the third quarter of 2003 in SG&A.



OTHER CLAIMS



Additionally, we are involved in various other claims and legal actions involving product liability, patent infringement, distributor
termination, employment law issues and other actions arising in the ordinary course of business. While complete assurance cannot be given to the outcome of these claims, we do not expect that any sum that may have to be paid in connection with these
matters will have a materially adverse effect on our consolidated financial position or liquidity, however it could be material to the results of operations in the particular period in which a matter is resolved.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



Armstrong World Industries, Inc. (AWI) is a Pennsylvania corporation incorporated in 1891. Armstrong Holdings, Inc. is a
Delaware corporation and the publicly held parent holding company of AWI. Armstrong Holdings, Inc.s only significant asset and operation is its indirect ownership, through Armstrong Worldwide, Inc., of all of the capital stock of AWI. The
following discussion and analysis pertains to both Armstrong Holdings, Inc. and its subsidiaries and Armstrong World Industries, Inc. and its subsidiaries due to the lack of material differences in the financial statements, as explained in Note 1 of
the Condensed Consolidated Financial Statements. Due to the lack of material differences in the financial statements, when we refer in this document to Armstrong Holdings, Inc. and its subsidiaries as AHI, Armstrong,
we, us, and ourselves, we are also effectively referring to AWI and its subsidiaries. We use the term AWI when we are referring solely to Armstrong World Industries, Inc.



References to performance excluding the translation effect of changes in foreign exchange
rates are non-GAAP measures. We believe that this information improves the comparability of business performance by excluding the impacts of changes in foreign exchange rates when translating comparable foreign currency amounts. We calculate the
translation effect of foreign exchange rates by applying the current years foreign exchange rates to the equivalent periods foreign currency amounts as reported in the prior year. Additionally, we reference operating income prior to the
charge for asbestos liability, net and the goodwill impairment. We believe that this non-GAAP reference provides a clearer picture of our operating performance.



This discussion should be read in conjunction with the financial statements and the accompanying notes included elsewhere in this Form 10-Q. It contains
forward-looking statements based on our current expectations, which are inherently subject to risks and uncertainties. Actual results and the timing of certain events may differ significantly from those referred to in such forward-looking
statements. We undertake no obligation beyond what is required under applicable securities law to publicly update or revise any forward-looking statement to reflect current or future events or circumstances, including those set forth in the section
entitled Cautionary Factors and elsewhere in this Form 10-Q.



We
maintain a Web site at http://www.armstrong.com. Information contained on our website is not incorporated into this document. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports
and other information about us are available free of charge through this website as soon as reasonably practicable after the reports are electronically filed with the Securities and Exchange Commission (SEC).



Overview



We are a leading global producer of flooring products and ceiling systems for use primarily
in the construction and renovation of residential, commercial and institutional buildings. Through our United States (U.S.) operations and U.S. and international subsidiaries, we design, manufacture and sell flooring products (resilient,
wood, carpeting and sports flooring) and ceiling systems (primarily mineral fiber, fiberglass and metal), around the world. We also design, manufacture and sell kitchen and bathroom cabinets in the U.S. We own and operate 44 manufacturing plants in
12 countries, including 26 plants located throughout the United States. Through WAVE, our joint venture with Worthington Industries, Inc., we also have an interest in 8 additional plants in 5 countries that produce suspension system (grid) products
for our ceiling systems.



Our business strategy focuses on product innovation,
product quality and customer service. In our businesses, these factors are the primary determinants of market share gain or loss. Our objective is to ensure that the vast majority of people buying a floor or ceiling can find an Armstrong product
that meets their needs. Our cabinet strategy is more focused  we sell stock cabinets in select geographic markets. In all our business segments, we have the same objectives: high quality, good customer service and products that meet our
customers needs. Our markets are very competitive, which limits our pricing flexibility. This makes very important increasing our productivity each year  both in our plants and in our administration of the businesses.



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



On December 6, 2000, AWI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware (the Bankruptcy Court) in order to use the court-supervised reorganization process to achieve a resolution of its asbestos liability. Also filing under Chapter 11 were two of AWIs wholly-owned subsidiaries, Nitram
Liquidators, Inc. and Desseaux Corporation of North America, Inc. The Chapter 11 cases are being jointly administered under case number 00-4471 (the Chapter 11 Case). AWI is operating its business and managing its properties as a
debtor-in-possession subject to the provisions of the Bankruptcy Code. See Note 2 of the Condensed Consolidated Financial Statements for information on the Chapter 11 Case and Note 12 of the Condensed Consolidated Financial Statements for
information on asbestos litigation.



Reportable Segments



Resilient Flooring  produces a
broad range of floor coverings for homes and commercial and institutional buildings. Resilient Flooring products include vinyl sheet, vinyl tile, linoleum flooring and luxury vinyl tile. In addition, our Resilient Flooring segment sources and sells
laminate flooring products, adhesives, installation and maintenance materials and accessories, and has recently introduced ceramic tile products. Resilient Flooring products are offered in a wide variety of types, designs, and colors, and provide
ease of installation. Many products offer reduced maintenance (no-wax). We sell these products to wholesalers, large home centers, retailers, contractors, and to the manufactured homes industry.



Wood Flooring  produces wood flooring products for use in new residential
construction and renovation, with some commercial applications in stores, restaurants and high-end offices. The product offering includes solid wood (pre-finished or unfinished) and engineered wood floors in various wood species (with oak being the
primary species of choice). Virtually all of our Wood Floorings sales are in North America. Our Wood Flooring products are generally sold to independent wholesale flooring distributors and large home centers under the brand names Bruce®, Hartco® and Robbins®.



Textiles and Sports Flooring (TSF)  produces carpeting and sports flooring products that are sold mainly in Europe. Carpeting products consist
principally of carpet tiles and broadloom used in commercial applications and in the leisure and travel industry. Sports flooring products include artificial turf and other sports surfaces. Our TSF products are sold primarily through retailers,
contractors, distributors and other industrial businesses.



Building
Products  produces suspended mineral fiber, soft fiber and metal ceiling systems for use in commercial, institutional and residential settings. In addition, our Building Products segment sources and sells wood ceiling systems. The products
are available in numerous colors, performance characteristics and designs, and offer attributes such as acoustical control, rated fire protection, and aesthetic appeal. Commercial ceiling materials and accessories are sold to ceiling systems
contractors and to resale distributors. Residential ceiling products are sold through wholesalers and retailers (including large home centers), primarily in North America. Suspension system (grid) products manufactured by WAVE are sold by both
Armstrong and the WAVE joint venture.



Cabinets  produces kitchen
and bathroom cabinetry and related products, which are used primarily in the U.S. residential new construction and renovation markets. Through our system of company-owned and independent distribution centers and through direct sales to builders, our
Cabinets segment provides design, fabrication and installation services to single and multi-family homebuilders, remodelers and consumers under the brand names Armstrong, Bruce®, and IXL®.



We also report
on two other segments, All Other (which relates to a corporate equity investment) and Unallocated Corporate Expense.



See Note 3 of the Condensed Consolidated Financial Statements for additional financial information on our reportable segments.



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(dollar amounts in millions)



Financial highlights for the second quarter and first six months of 2004:



|                                                                                     |  |      |         |   |      |   |         |                     |  |           |                                             |  |           |  
|------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ------------------- |  | --------- | ------------------------------------------- |  | --------- | -
|                                                                                     |  |      |         |   |      |   |         | Change is Favorable | 
|                                                                                     |  | 2004 |         |   | 2003 |   |         | As Reported         |  |           | Excluding Effects of Foreign Exchange Rates | 
|Three months ending June 30                                                          |  |      |         |   |      |   |         |                     |  |           |                                             |  |           |  
|Total Consolidated Net Sales                                                         |  | $    | 903.5   |   |      | $ | 826.9   |                     |  | 9.3       | %                                           |  | 7.1       | %
|Operating Income/(Loss)                                                              |  | $    | 3.6     |   |      | $ | (33.4   | )                   |  | Favorable |                                             |  | Favorable |  
|Charge for Asbestos Liability, Net                                                   |  |      |        |   |      |   | (73.0   | )                   |  |           |                                             |  |           |  
|Goodwill Impairment                                                                  |  |      | (60.0   | ) |      |   |        |                     |  |           |                                             |  |           |  
|Operating Income prior to Charge for Asbestos Liability, Net and Goodwill Impairment |  | $    | 63.6    |   |      | $ | 39.6    |                     |  | 60.6      | %                                           |  | 56.7      | %
|Net increase in cash and cash equivalents                                            |  | $    | 58.2    |   |      | $ | 14.2    |                     |  | Favorable |                                             |  |           |  
|Six months ending June 30                                                            |  |      |         |   |      |   |         |                     |  |           |                                             |  |           |  
|Total Consolidated Net Sales                                                         |  | $    | 1,748.5 |   |      | $ | 1,601.8 |                     |  | 9.2       | %                                           |  | 5.8       | %
|Operating Income/(Loss)                                                              |  | $    | 45.2    |   |      | $ | (22.1   | )                   |  | Favorable |                                             |  | Favorable |  
|Charge for Asbestos Liability, Net                                                   |  |      |        |   |      |   | (73.0   | )                   |  |           |                                             |  |           |  
|Goodwill Impairment                                                                  |  |      | (60.0   | ) |      |   |        |                     |  |           |                                             |  |           |  
|                                                                                     |  |      |         |   |      |   |         |                     |  |           |                                             |  |           |  
|Operating Income prior to Charge for Asbestos Liability, Net and Goodwill Impairment |  | $    | 105.2   |   |      | $ | 50.9    |                     |  | Favorable |                                             |  | Favorable |  
|Net increase (decrease) in cash and cash equivalents                                 |  | $    | 10.0    |   |      | $ | (61.1   | )                   |  | Favorable |                                             |  |           |  



In the second quarter of 2004:



| |  | We continued to experience strong demand for our products in the North American residential and commercial markets.
| | - | -------------------------------------------------------------------------------------------------------------------



| |  | Our sales performance in Europe was mixed, but overall up from the prior year. Sales of TSF products fell short of 2003 levels.
| | - | -------------------------------------------------------------------------------------------------------------------------------



| |  | We incurred higher raw material costs, particularly for lumber and PVC resins.
| | - | ------------------------------------------------------------------------------



| |  | We benefited from operating cost reduction initiatives implemented in prior years.
| | - | ----------------------------------------------------------------------------------



| |  | We recorded a $60 million non-cash goodwill impairment loss in Resilient Flooring related to our European resilient flooring reporting unit (see Note 7).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Cash and cash equivalents improved significantly due to higher operating income and better working capital efficiency.
| | - | ----------------------------------------------------------------------------------------------------------------------



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(dollar amounts in millions)



Factors Affecting Revenues



Markets. We compete in building material markets around the world. The majority of our sales opportunity is in the North American and
European markets. During the second quarter of 2004, these markets experienced the following, according to U.S. Government and industry reports:



| |  | In the North American residential market, housing activity remained strong. As a result of increased amount of construction starts in the second half of 2003, compared to the same
period in 2002, U.S. single family housing completions in the second quarter of 2004 were approximately 15% higher than in the second quarter of 2003 (our products tend to be installed towards the latter stages of the housing construction process).
U.S. housing starts in the second quarter of 2004 were approximately 10% above the second quarter of 2003.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



U.S. retail sales of building materials, garden equipment and supply stores (an indicator of home renovation activity) increased significantly in the
second quarter of 2004 over sales levels in the second quarter of 2003. This was partially due to strong sales of existing homes during the August to October months in 2003, after allowing for the usual lag for renovation-related expenditures.



| |  | The North American commercial market grew, primarily due to increased renovation activity. Two indicators of renovation opportunity, the dollar value of large renovation projects
and total office employment, reported increases compared to the second quarter of 2003.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The increased demand for steel and a shortage of coke has created a steel shortage in the U.S. The steel shortage has increased raw material costs for our WAVE joint venture. This
increase has been largely offset by price increases. Additionally, several North American iron-ore mines have recently experienced work stoppages. Protracted stoppages may also negatively affect steel costs and availability. An extended steel
shortage could cause U.S. construction starts to be delayed or postponed, which could reduce our commercial sales. To-date, sales of our commercial products have not been impacted by the shortage.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Quality and Customer Service. Our quality and customer service are critical components
of our total value proposition. In 2004, we experienced the following:



| |  | We experienced a surge in orders for solid wood flooring products in the fourth quarter of 2003, and incoming orders in the first six months of 2004 for solid and engineered wood
flooring products were substantially higher than those received in the first six months of 2003. Our performance in fulfilling these orders has been less than satisfactory. We are increasing our capacity and lumber inventory in order to improve
customer service performance levels.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In April 2004, a key U.S. supplier of PVC resins to Armstrong had a substantial portion of one of its plants destroyed in an explosion. PVC resins are a key raw material for
manufacturing vinyl flooring, and this plant represented a sizeable portion of the capacity for these resins in the U.S. We identified and qualified alternate suppliers. These additional suppliers, together with various manufacturing initiatives,
have allowed us to operate without significant disruptions to customer supply.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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(dollar amounts in millions)



Pricing Initiatives. In the second, third and fourth quarters of 2003, increased costs for raw materials,
labor and labor-related expenses, energy and other areas led us to increase prices. These initiatives increased net sales in the first six months of 2004 compared to the first six months of 2003. The most significant pricing actions were:



| |  | In Resilient Flooring, we implemented price increases for selected U.S. commercial products in July 2003. We also implemented an increase on selected U.S. residential products in
November 2003.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In Wood Flooring, we implemented a price increase on solid wood products in April 2003. We also announced increases on solid wood products that became effective in November 2003 and
January 2004.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In Building Products, a price increase was announced for most commercial acoustical ceiling products in the North American markets, effective July 1, 2003. Price increases on
certain products to our large home center customers in the U.S. were implemented in August and September of 2003. We also increased prices for certain U.S. residential-oriented products sold through distribution in July 2003. An additional increase
for most commercial products was announced in the fourth quarter of 2003, which became effective January 1, 2004.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In Cabinets, we announced price increases in September 2003 to our retail customers and our builder and distributor customers.
| | - | ------------------------------------------------------------------------------------------------------------------------------



During the first seven months of 2004, the most significant pricing actions were:



| |  | In Resilient Flooring, we announced a price increase in April for commercial vinyl composition tile products, effective later in the second quarter and third quarter. Additionally,
in June, we announced a price increase on selected residential and commercial vinyl sheet flooring products, to be effective in the third quarter.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In Wood Flooring, we announced a price increase in April for selected solid hardwood products, which was effective in the second quarter. Additionally, in the second quarter, we
lowered prices for selected engineered hardwood products in response to imported and domestic competitive products.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In Building Products, a price increase was announced in April for most commercial acoustical ceiling products in the U.S. market, effective July 1, 2004. In May and June, price
increases were announced for certain products to our large home center customers and for residential-oriented products through distribution, to be effective through the second half.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In Cabinets, we announced price increases to our retail customers and our builder and distributor customers that became effective in June.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



In certain cases, price increases actually realized were less than the announced price
increases because we had to adjust to competitive actions and changing market conditions. Also during the first six months of 2004, we made several price concessions for certain products in some of our segments and geographic regions, again to
respond to competitive conditions.



The pricing actions described above
increased consolidated net sales in the second quarter of 2004 by approximately $20 million and in the first six months of 2004 by approximately $33 million, when compared to the same periods of 2003.



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



Factors Affecting Operating Costs



Operating Expenses. Our operating expenses consist of direct production costs (principally raw materials, labor and energy) and
manufacturing overhead costs, costs to purchase sourced products and SG&A.



Our most important commodities are lumber and veneers, PVC, backings for various flooring products and plasticizers. We also consume large quantities of energy in our manufacturing processes, in particular natural gas in our mineral fiber
ceilings manufacturing process. Fluctuations in the prices of these components of our production processes are generally beyond our control and have a direct impact on our financial results. In the second quarter of 2004, we experienced the
following:



| |  | Prices for hardwood lumber increased from the second quarter of 2003 through the first quarter of 2004, as the availability of lumber for flooring decreased due to poor weather
conditions for timbering and reductions in industry saw mill capacity, while demand for the lumber (for flooring and other products such as railroad ties and pallets) remained strong. In the second quarter of 2004, lumber prices were relatively
consistent with those of the first quarter. We have been able to partially reduce the impact of the year-over-year increased costs through an improved procurement process. However, our cost for acquiring lumber in the second quarter of 2004 was
approximately $9 million greater than in the second quarter of 2003 and approximately $22 million greater in the six month comparative period. Lumber costs for the year 2004 will exceed those in 2003.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | PVC is a widely used oil-based raw material. We experience cost pressures on PVC when energy prices increase and when industrial demand for the material increases. PVC resin and
film prices increased by approximately $3 million in the second quarter of 2004 compared to the second quarter of 2003 and increased approximately $4.4 million in the six month comparative period. A portion of this increase resulted from the
suppliers plant explosion discussed above in Quality and Customer Service. We believe the cost for these oil-based raw materials will continue to exceed those in 2003.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Costs for natural gas have increased significantly over the past several years. In the second quarter of 2004, we incurred approximately $1.7 million of additional costs for natural
gas compared to the second quarter of 2003 and approximately $2.7 million more in the six month comparative period.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Production wages and non-production salaries increased approximately $6 million and $12 million for the second quarter and first six months of 2004, respectively,
compared to the same periods in 2003.



On December 8, 2003, the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act) became law in the United States. Pursuant to accounting guidance on the Act issued in the second quarter of 2004, we elected to begin recording the effect of the Act
in the second quarter. Since the Act is effective retroactive to January 1, 2004 and the total year benefit will be $7 million, operating income for the six months ended June 30, 2004 benefited by $3.5 million. This benefit was evenly apportioned
between the first and second quarters and was recorded in cost of goods sold ($1.9 million) and SG&A ($1.6 million).



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(dollar amounts in millions)



Cost Reduction Initiatives. During 2003, we implemented several manufacturing and organizational changes to
improve our cost structure and enhance our competitive position. Specifically:



| |  | We ceased production of our residential stencil vinyl flooring product line in the third quarter.
| | - | -------------------------------------------------------------------------------------------------



| |  | We closed two Wood Flooring facilities that manufactured engineered wood floors, one in each of the third and fourth quarters, consolidating their production volume into another
Wood Flooring facility.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We closed a Textiles and Sports Flooring plant in The Netherlands in the third quarter.
| | - | ---------------------------------------------------------------------------------------



| |  | We consolidated several sales, operational and administrative support organizations throughout our company. This consolidation included integrating our U.S. Resilient Flooring and
Wood Flooring organizations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We incurred the following
costs in 2003 for implementing these initiatives:



|                                 |  |                   |     |      |   |               |  |                |     |  |   |    
|-------------------------------- |  | ----------------- | --- | ---- | - | ------------- |  | -------------- | --- |  | - | ---
|                                 |  | Cost ofGoods Sold |     | SG&A |   | Restructuring |  | Total Expenses
|Three months ended June 30, 2003 |  |                   |     |      |   |               |  |                |     |  |   |    
|Resilient Flooring               |  | $                 |    |      | $ | 0.3           |  | $              | 0.2 |  | $ | 0.5
|Wood Flooring                    |  |                   |    |      |   | 0.4           |  |                |    |  |   | 0.4
|Textiles & Sports Flooring       |  |                   |    |      |   |              |  |                | 0.7 |  |   | 0.7
|Building Products                |  |                   | 0.1 |      |   | 0.2           |  |                |    |  |   | 0.3
|Corporate Unallocated            |  |                   |    |      |   | 0.9           |  |                |    |  |   | 0.9
|                                 |  |                   |     |      |   |               |  |                |     |  |   |    
|Total Consolidated               |  | $                 | 0.1 |      | $ | 1.8           |  | $              | 0.9 |  | $ | 2.8
|                                 |  |                   |     |      |   |               |  |                |     |  |   |    
|Six months ended June 30, 2003   |  |                   |     |      |   |               |  |                |     |  |   |    
|Resilient Flooring               |  | $                 |    |      | $ | 0.4           |  | $              | 1.1 |  | $ | 1.5
|Wood Flooring                    |  |                   |    |      |   | 1.1           |  |                |    |  |   | 1.1
|Textiles & Sports Flooring       |  |                   |    |      |   |              |  |                | 3.0 |  |   | 3.0
|Building Products                |  |                   | 0.1 |      |   | 0.2           |  |                |    |  |   | 0.3
|Corporate Unallocated            |  |                   |    |      |   | 1.6           |  |                |    |  |   | 1.6
|                                 |  |                   |     |      |   |               |  |                |     |  |   |    
|Total Consolidated               |  | $                 | 0.1 |      | $ | 3.3           |  | $              | 4.1 |  | $ | 7.5
|                                 |  |                   |     |      |   |               |  |                |     |  |   |    



During 2004, we announced that we will
cease production at our Building Products plant in The Netherlands, subject to positive advice from the local works council. We anticipate ceasing production in early 2005. We recorded the following costs to-date in 2004 for this initiative, with
the cost of goods sold being primarily for accelerated depreciation:



|                                 |  |                   |     |               |   |                |  |   |    
|-------------------------------- |  | ----------------- | --- | ------------- | - | -------------- |  | - | ---
|                                 |  | Cost ofGoods Sold |     | Restructuring |   | Total Expenses
|Three months ended June 30, 2004 |  |                   |     |               |   |                |  |   |    
|Building Products                |  | $                 | 0.7 |               | $ | 1.6            |  | $ | 2.3
|                                 |  |                   |     |               |   |                |  |   |    
|Total Consolidated               |  | $                 | 0.7 |               | $ | 1.6            |  | $ | 2.3
|                                 |  |                   |     |               |   |                |  |   |    
|Six months ended June 30, 2004   |  |                   |     |               |   |                |  |   |    
|Building Products                |  | $                 | 1.4 |               | $ | 3.9            |  | $ | 5.3
|                                 |  |                   |     |               |   |                |  |   |    
|Total Consolidated               |  | $                 | 1.4 |               | $ | 3.9            |  | $ | 5.3
|                                 |  |                   |     |               |   |                |  |   |    



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



Factors Affecting Cash Flow



Historically, excluding the cash demands for asbestos-related claims in 2000 and prior years, we typically generate positive cash flow
during a calendar year from our operating activities. The amount of cash generated in any year, or in the quarters of any year, is dependent on a number of factors, including the amount of operating profit generated and the amount of working capital
(such as inventory, receivables and payables) required to operate our businesses. We typically invest in property, plant & equipment (PP&E) and computer software throughout a calendar year.



During the first six months of 2004, our cash and cash equivalents balance increased by $10.0
million, compared to a $61.1 million decrease during the same period of 2003. The year-to-year improvement was due primarily to $38.7 million of cash being provided by operating activities in 2004, compared to $32.6 million of cash being used in
2003, with increased net earnings and additional accounts payable and accrued expenses accounting for the majority of the change.



Employee Relations



As of June 30, 2004, we had approximately 15,300 full-time and part-time employees worldwide, compared to approximately 16,000 employees as of June 30, 2003. The decrease
in employment was primarily caused by our implementing the above mentioned cost reduction initiatives.



RESULTS OF OPERATIONS



Unless
otherwise indicated, net sales in these results of operations are reported based upon the location where the sale was made.



2004 COMPARED TO 2003

CONSOLIDATED RESULTS



|                               |  |      |         |   |      |   |         |                                   |  |           |                                              |  |           |   
|------------------------------ |  | ---- | ------- | - | ---- | - | ------- | --------------------------------- |  | --------- | -------------------------------------------- |  | --------- | --
|                               |  |      |         |   |      |   |         | Change is Favorable/(Unfavorable) | 
|                               |  | 2004 |         |   | 2003 |   |         | AsReported                        |  |           | Excluding Effects ofForeign ExchangeRates(1) | 
|Three months ending June 30    |  |      |         |   |      |   |         |                                   |  |           |                                              |  |           |   
|Net Sales:                     |  |      |         |   |      |   |         |                                   |  |           |                                              |  |           |   
|Americas                       |  | $    | 661.6   |   |      | $ | 613.1   |                                   |  | 7.9       | %                                            |  | 7.7       | % 
|Europe                         |  |      | 216.8   |   |      |   | 192.7   |                                   |  | 12.5      | %                                            |  | 5.0       | % 
|Pacific                        |  |      | 25.1    |   |      |   | 21.1    |                                   |  | 19.0      | %                                            |  | 11.1      | % 
|                               |  |      |         |   |      |   |         |                                   |  |           |                                              |  |           |   
|Total Consolidated Net Sales   |  | $    | 903.5   |   |      | $ | 826.9   |                                   |  | 9.3       | %                                            |  | 7.1       | % 
|Operating Income/(Loss)        |  | $    | 3.6     |   |      | $ | (33.4   | )                                 |  | Favorable |                                              |  | Favorable |   
|Operating Income/(Loss) Margin |  |      | 0.4     | % |      |   | (4.0    | )%                                |  |           |                                              |  |           |   
|Six months ending June 30      |  |      |         |   |      |   |         |                                   |  |           |                                              |  |           |   
|Net Sales:                     |  |      |         |   |      |   |         |                                   |  |           |                                              |  |           |   
|Americas                       |  | $    | 1,279.9 |   |      | $ | 1,180.8 |                                   |  | 8.4       | %                                            |  | 8.0       | % 
|Europe                         |  |      | 421.2   |   |      |   | 382.4   |                                   |  | 10.1      | %                                            |  | (1.1      | )%
|Pacific                        |  |      | 47.4    |   |      |   | 38.6    |                                   |  | 22.8      | %                                            |  | 12.3      | % 
|                               |  |      |         |   |      |   |         |                                   |  |           |                                              |  |           |   
|Total Consolidated Net Sales   |  | $    | 1,748.5 |   |      | $ | 1,601.8 |                                   |  | 9.2       | %                                            |  | 5.8       | % 
|Operating Income/(Loss)        |  | $    | 45.2    |   |      | $ | (22.1   | )                                 |  | Favorable |                                              |  | Favorable |   
|Operating Income/(Loss) Margin |  |      | 2.6     | % |      |   | (1.4    | )%                                |  |           |                                              |  |           |   



|(1) | Excludes favorable foreign exchange rate effect in translation: Three months -
$16.5 million on net sales and $1.0 million on operating income; Six months - $51.2 million on net sales and $1.6 million on operating income.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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(dollar amounts in millions)



Net sales in the Americas increased for the second quarter and first six months primarily from improved demand for
our products in both the residential and commercial markets and from the positive effects of the above-mentioned pricing initiatives. All businesses in this region increased sales for the first six months.



Excluding the translation effect of changes in foreign exchange rates, net sales in the
European markets increased 5.0% for the second quarter but decreased 1.1% for the first six months. For both the second quarter and first six months compared to the same periods in 2003, Resilient Flooring and Building Products recorded increases in
sales, while sales of TSF products declined.



Excluding the translation effect
of changes in foreign exchange rates, net sales in the Pacific area increased $2.5 million for the second quarter and $5.2 million for the first six months, as a result of stronger sales in China and Australia.



Cost of goods sold in the second quarter of 2004 was 76.0% of net sales, compared to 78.2% in
the same period of 2003. Cost of goods sold in the first six months of 2004 was 77.1% of net sales, compared to 78.3% in the same period of 2003. The percentage reductions were primarily due to the favorable impacts of increased volumes and the
above-mentioned cost reduction and pricing initiatives, partially offset by increased raw material and labor costs. We recorded a benefit of $0.9 million and $1.9 million for the second quarter and first six months, respectively, related to the
Medicare Act (see Note 9). Additionally, we recorded $0.7 million and $1.4 million of costs in the second quarter and first six months of 2004, respectively, as a result of announcing our intentions to cease production at the Building Products
manufacturing location in Hoogezand, The Netherlands, subject to positive advice from the local works council.



SG&A in the second quarter of 2004 were $162.3 million (18.0% of net sales) and $309.9 million (17.7% of net sales) for the first six months of 2004, compared to $146.0 million (17.7% of net sales) and $303.3
million (18.9% of net sales) for the corresponding 2003 periods. We recorded a benefit of $0.8 million and $1.6 million for the second quarter and first six months, respectively, related to the Medicare Act (see Note 9). Excluding the translation
effect of changes in foreign exchange rates of $3.6 million, SG&A expenses in the second quarter were $12.7 million higher than the 2003 SG&A expenses, primarily as a result of higher employee bonus accruals and a $3.5 million charge for
environmental matters, partially offset by the cost reduction initiatives described above. Excluding the translation effect of changes in foreign exchange rates of $12.7 million, SG&A expenses in the first six months were $6.1 million less than
the 2003 SG&A expenses, primarily as a result of the cost reduction initiatives described above.



In the second quarter of 2003, we recorded a non-cash charge of $73.0 million related to managements updated assessment of probable asbestos-related insurance asset recoveries. See Note 12 for further
discussion.



In the second quarter of 2004, we recorded a $60 million non-cash
goodwill impairment loss related to our European resilient flooring reporting unit based on a preliminary impairment assessment. Any adjustment to the estimated impairment loss based on the completion of these valuations will be recorded during the
second half of 2004. See Note 7 for further discussion.



We recorded a net
restructuring charge of $1.1 million in the second quarter and $3.1 million in the first six months of 2004, primarily due to plans to cease production at the Building Products manufacturing location in Hoogezand, The Netherlands, subject to
positive advice from the local works council. This action is being taken as there is excess production capacity in the European mineral and soft fiber ceiling industry. It is planned that the production will be transferred to another Building
Products location in Münster, Germany and will result in a net reduction of approximately 72 positions. We expect to incur approximately $16.9 million of additional charges related to this plant closure for accelerated depreciation of
equipment, plant closure activities, transition costs for shifting production capabilities to another European facility and severances, with $6.6 million expected to be incurred during the remainder of the year. This cost reduction initiative is
expected to result in $7.6 million in annual savings. In the second quarter and first six months of 2003, we recorded net restructuring charges of $0.9 million and $4.1 million, primarily from consolidating certain functions in the European flooring
businesses.



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



Equity earnings from affiliates, primarily from our WAVE joint venture, were $10.6 million in the second quarter and
$17.2 million for the first six months of 2004, as compared to $6.1 million and $11.4 million in the same periods of 2003.



Operating income of $3.6 million in the second quarter and $45.2 million in the first six months of 2004 compared to operating losses of $33.4 million and $22.1 million
in the same periods of 2003.



Interest expense was $2.2 million in the second
quarter and $4.4 million in the first six months of 2004, compared to $2.6 million and $5.4 million in the same periods of 2003. The decrease in interest expense is due primarily to interest rate differentials for foreign currency hedging activity.
In accordance with SOP 90-7, we did not record contractual interest expense on prepetition debt after the Chapter 11 filing date. This unrecorded interest expense was $21.7 million in the second quarter and $43.4 million in the first six months of
2004 and $25.0 million and $49.8 million in the same periods of 2003.



Other
non-operating expense was $1.6 million in the second quarter of 2004 compared to $1.2 million expense recorded in 2003. Other non-operating expense of $3.5 million in the first six months of 2004 was $1 million higher than the $2.5 million expense
recorded in 2003, primarily due to increasing our environmental and other long-term liabilities, which were both related to previous divestitures.



Other non-operating income was $1.1 million in the second quarter of 2004 compared to $0.9 million recorded in 2003. Other non-operating income was $2.3 million in the
first six months of 2004 compared to $1.7 million recorded in 2003.



Chapter 11
reorganization costs, net in the second quarter of 2004 were $1.8 million, which was $4.1 million less than the $5.9 million amount recorded in 2003. In the first six months of 2004, these costs were $4.3 million, which was $5.6 million less than
the $9.9 million amount recorded in 2003. The decreases are primarily due to less professional fees caused by lower activity in the Chapter 11 case.



In the second quarter of 2004, income tax expense of $13.6 million compared to an income tax benefit of $7.9 million in 2003. Excluding the non-cash goodwill impairment
loss in the second quarter of 2004, which is a nontaxable event, the effective tax expense rate in 2004 was 23.0% for the quarter and 31.7% for the first six months and in 2003 was an effective tax benefit rate of 18.7% for the quarter and 15.2% for
the first six months. The changes were primarily due to the overall favorable settlement of tax audits that reduced the effective tax rate for 2004. During the second quarter, the IRS completed the audit for the years 2000 and 2001 resulting in a
favorable conclusion regarding the deductibility of certain chapter 11 related costs and other issues.



A net loss of $14.5 million for the second quarter and net income of $5.1 million for the first six months of 2004 compared to net losses of $34.3 million and $32.4 million for the same periods for 2003.



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



REPORTABLE SEGMENT RESULTS

Resilient Flooring



|                               |  |      |       |    |      |   |       |                                   |  |             |                                              |  |             |   
|------------------------------ |  | ---- | ----- | -- | ---- | - | ----- | --------------------------------- |  | ----------- | -------------------------------------------- |  | ----------- | --
|                               |  |      |       |    |      |   |       | Change is Favorable/(Unfavorable) | 
|                               |  | 2004 |       |    | 2003 |   |       | As Reported                       |  |             | Excluding Effects ofForeign ExchangeRates(1) | 
|Three months ending June 30    |  |      |       |    |      |   |       |                                   |  |             |                                              |  |             |   
|Net Sales:                     |  |      |       |    |      |   |       |                                   |  |             |                                              |  |             |   
|Americas                       |  | $    | 247.2 |    |      | $ | 248.0 |                                   |  | (0.3        | )%                                           |  | (0.7        | )%
|Europe                         |  |      | 62.6  |    |      |   | 50.2  |                                   |  | 24.7        | %                                            |  | 15.9        | % 
|Pacific                        |  |      | 12.1  |    |      |   | 10.1  |                                   |  | 19.8        | %                                            |  | 10.0        | % 
|                               |  |      |       |    |      |   |       |                                   |  |             |                                              |  |             |   
|Total Segment Net Sales        |  | $    | 321.9 |    |      | $ | 308.3 |                                   |  | 4.4         | %                                            |  | 2.5         | % 
|Operating Income/(Loss)        |  | $    | (39.5 | )  |      | $ | 19.1  |                                   |  | Unfavorable |                                              |  | Unfavorable |   
|Operating Income/(Loss) Margin |  |      | (12.3 | )% |      |   | 6.2   | %                                 |  |             |                                              |  |             |   
|Six months ending June 30      |  |      |       |    |      |   |       |                                   |  |             |                                              |  |             |   
|Net Sales:                     |  |      |       |    |      |   |       |                                   |  |             |                                              |  |             |   
|Americas                       |  | $    | 482.2 |    |      | $ | 473.5 |                                   |  | 1.8         | %                                            |  | 1.3         | % 
|Europe                         |  |      | 119.8 |    |      |   | 102.5 |                                   |  | 16.9        | %                                            |  | 4.5         | % 
|Pacific                        |  |      | 24.0  |    |      |   | 19.0  |                                   |  | 26.3        | %                                            |  | 13.2        | % 
|                               |  |      |       |    |      |   |       |                                   |  |             |                                              |  |             |   
|Total Segment Net Sales        |  | $    | 626.0 |    |      | $ | 595.0 |                                   |  | 5.2         | %                                            |  | 2.3         | % 
|Operating Income/(Loss)        |  | $    | (23.4 | )  |      | $ | 36.7  |                                   |  | Unfavorable |                                              |  | Unfavorable |   
|Operating Income/(Loss) Margin |  |      | (3.7  | )% |      |   | 6.2   | %                                 |  |             |                                              |  |             |   



|(1) | Excludes favorable foreign exchange rate effect in translation: Three months -
$5.6 million on net sales and $0.7 million on operating income; Six months - $16.7 million on net sales and $0.8 million on operating income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net sales in the Americas decreased slightly in the second quarter, with sales to the residential and commercial markets marginally lower than last year. Excluding the
translation effect of changes in foreign exchange rates, net sales increased 1.3% for the first six months, primarily due to volume gains in the residential and commercial markets and from the effects of the previously described price increases.



Excluding the translation effect of changes in foreign exchange rates, net
sales in the European markets increased 15.9% for the second quarter and 4.5% for the first six months, primarily due to unit volume growth of vinyl flooring products, partially offset by a 1% unit volume decline in sales of linoleum for both
periods.



Excluding the translation effect of changes in foreign exchange
rates, net sales in the Pacific area increased $1.1 million for the second quarter and $2.8 million for the first six months.



Operating results decreased $58.6 million for the second quarter and $60.1 million for the first six months. In the second quarter of 2004, we recorded a non-cash
goodwill impairment loss of $60 million related to our European resilient flooring reporting unit (see Note 7). Operating results also decreased due to increased raw material costs and wage and salary increases, which were offset by increased sales,
the positive effects of the above mentioned cost reduction initiatives and lower SG&A expenses. Operating income benefited in the first six months by $1.4 million from recording the effect of the Medicare Act. Additionally, Resilient Flooring
recorded a net reversal of $0.5 million for restructuring activities in the first six months of 2004, compared to a $1.1 million net restructuring charge in 2003.



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



Wood Flooring



|                            |  |      |       |   |      |   |       |                    |  |           |  
|--------------------------- |  | ---- | ----- | - | ---- | - | ----- | ------------------ |  | --------- | -
|                            |  | 2004 |       |   | 2003 |   |       | Change isFavorable | 
|                            |  |      |      
|Three months ending June 30 |  |      |       |   |      |   |       |                    |  |           |  
|Total Segment Net Sales(1)  |  | $    | 214.1 |   |      | $ | 181.6 |                    |  | 17.9      | %
|Operating Income            |  | $    | 21.1  |   |      | $ | 5.7   |                    |  | Favorable |  
|Operating Income Margin     |  |      | 9.9   | % |      |   | 3.1   | %                  |  |           |  
|Six months ending June 30   |  |      |       |   |      |   |       |                    |  |           |  
|Total Segment Net Sales(1)  |  | $    | 411.5 |   |      | $ | 348.8 |                    |  | 18.0      | %
|Operating Income            |  | $    | 31.4  |   |      | $ | 7.9   |                    |  | Favorable |  
|Operating Income Margin     |  |      | 7.6   | % |      |   | 2.3   | %                  |  |           |  



|(1) | Virtually all Wood Flooring products are sold in the Americas, primarily in the U.S.
|--- | ------------------------------------------------------------------------------------



Net sales for the second quarter and the first six months
increased by $32.5 million and $62.7 million, respectively. Units sold of pre-finished solid and engineered hardwood floors increased by approximately 14% and 3%, respectively, in the second quarter and 15% and 4%, respectively, in the first six
months due to the strong U.S. residential market. Net sales were also positively impacted by the price increases implemented for solid wood flooring products (see Overview  Factors Affecting Revenues).



Operating income in the second quarter and first six months increased by $15.4 million and
$23.5 million, respectively, from the same periods in 2003. For both the quarter and six months, the increase was due to the previously described price increases and the sales volume gains, and lower manufacturing overhead costs resulting from the
previously described cost reduction initiatives, partially offset by higher lumber costs.



Textiles and Sports Flooring (TSF)



|                            |  |      |             |    |      |                                              |       |                                   |  |           |    |  |           |   
|--------------------------- |  | ---- | ----------- | -- | ---- | -------------------------------------------- | ----- | --------------------------------- |  | --------- | -- |  | --------- | --
|                            |  | 2004 |             |    | 2003 |                                              |       | Change is Favorable/(Unfavorable) | 
|                            |  |      | As Reported |    |      | Excluding Effects ofForeign ExchangeRates(1) |      
|Three months ending June 30 |  |      |             |    |      |                                              |       |                                   |  |           |    |  |           |   
|Total Segment Net Sales     |  | $    | 65.1        |    |      | $                                            | 67.1  |                                   |  | (3.0      | )% |  | (8.7      | )%
|Operating (Loss)            |  | $    | (1.7        | )  |      | $                                            | (3.1  | )                                 |  | Favorable |    |  | Favorable |   
|Operating (Loss) Margin     |  |      | (2.6        | )% |      |                                              | (4.6  | )%                                |  |           |    |  |           |   
|Six months ending June 30   |  |      |             |    |      |                                              |       |                                   |  |           |    |  |           |   
|Total Segment Net Sales     |  | $    | 127.4       |    |      | $                                            | 129.1 |                                   |  | (1.3      | )% |  | (11.4     | )%
|Operating (Loss)            |  | $    | (3.6        | )  |      | $                                            | (9.1  | )                                 |  | Favorable |    |  | Favorable |   
|Operating (Loss) Margin     |  |      | (2.8        | )% |      |                                              | (7.0  | )%                                |  |           |    |  |           |   



|(1) | Excludes favorable/(unfavorable) foreign exchange rate effect in translation: Three months -
$4.2 million on net sales and $(0.1) million on operating income; Six months - $14.7 million on net sales and $(1.1) million on operating income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net sales decreased for the second quarter and first six months primarily from volume declines in our carpet products and due to weak economic conditions in our
primary markets.



Operating losses in the second quarter and first six months
decreased from the same periods in 2003. In the quarter and six months, reduced manufacturing expenses from the previously described cost reduction initiatives and lower raw material costs, and the effects of selling price increases partially offset
the negative impact of the sales volume declines. Additionally, TSF recorded a net reversal of $0.3 million for restructuring activities in the first six months of 2004, compared to a $3.0 million restructuring charge in 2003.



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



Building Products



|                            |  |      |       |             |      |   |                                              |                     |  |      |   |  |      |  
|--------------------------- |  | ---- | ----- | ----------- | ---- | - | -------------------------------------------- | ------------------- |  | ---- | - |  | ---- | -
|                            |  | 2004 |       |             | 2003 |   |                                              | Change is Favorable | 
|                            |  |      |       | As Reported |      |   | Excluding Effects ofForeign ExchangeRates(1) |                    
|Three months ending June 30 |  |      |       |             |      |   |                                              |                     |  |      |   |  |      |  
|Net Sales:                  |  |      |       |             |      |   |                                              |                     |  |      |   |  |      |  
|Americas                    |  | $    | 145.3 |             |      | $ | 131.0                                        |                     |  | 10.9 | % |  | 10.5 | %
|Europe                      |  |      | 89.0  |             |      |   | 74.7                                         |                     |  | 19.1 | % |  | 10.7 | %
|Pacific                     |  |      | 13.0  |             |      |   | 11.0                                         |                     |  | 18.2 | % |  | 12.1 | %
|                            |  |      |       |             |      |   |                                              |                     |  |      |   |  |      |  
|Total Segment Net Sales     |  | $    | 247.3 |             |      | $ | 216.7                                        |                     |  | 14.1 | % |  | 10.6 | %
|Operating Income            |  | $    | 38.4  |             |      | $ | 27.8                                         |                     |  | 38.1 | % |  | 34.7 | %
|Operating Income Margin     |  |      | 15.5  | %           |      |   | 12.8                                         | %                   |  |      |   |  |      |  
|Six months ending June 30   |  |      |       |             |      |   |                                              |                     |  |      |   |  |      |  
|Net Sales:                  |  |      |       |             |      |   |                                              |                     |  |      |   |  |      |  
|Americas                    |  | $    | 280.9 |             |      | $ | 255.2                                        |                     |  | 10.1 | % |  | 9.2  | %
|Europe                      |  |      | 173.0 |             |      |   | 149.0                                        |                     |  | 16.1 | % |  | 4.7  | %
|Pacific                     |  |      | 23.4  |             |      |   | 19.6                                         |                     |  | 19.4 | % |  | 11.4 | %
|                            |  |      |       |             |      |   |                                              |                     |  |      |   |  |      |  
|Total Segment Net Sales     |  | $    | 477.3 |             |      | $ | 423.8                                        |                     |  | 12.6 | % |  | 7.6  | %
|Operating Income            |  | $    | 66.3  |             |      | $ | 45.6                                         |                     |  | 45.4 | % |  | 38.4 | %
|Operating Income Margin     |  |      | 13.9  | %           |      |   | 10.8                                         | %                   |  |      |   |  |      |  



|(1) | Excludes favorable foreign exchange rate effect in translation: Three months - $6.8 million
on net sales and $0.7 million on operating income; Six months - $19.7 million on net sales and $2.3 million on operating income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Excluding the translation effect of changes in foreign exchange rates, net sales in the Americas increased 10.5% for the second quarter and 9.2% for the first six months.
Unit volume to the U.S. Commercial markets increased by approximately 6% for the quarter and 7% for the six months, primarily due to improved market conditions. Net sales also benefited from the previously described pricing initiatives and positive
unit volume gains in the Latin American markets.



Excluding the translation
effect of changes in foreign exchange rates, net sales in the European markets increased 10.7% for the second quarter and 4.7% for the first six months. In the second quarter, the volume of mineral fiber product sold to Western European countries
was even to last year, with the first six months declining by 2%, while the volume of product sold in the emerging markets of Eastern Europe (primarily Russia) increased by approximately 16% in the second quarter and 10% in the first six months.
Products sold to the emerging markets tend to have lower margin than products sold in Western Europe. Excluding the translation effect of changes in foreign exchange rates, net sales of metal ceilings were 3% lower in the second quarter, but
increased 2% in the first six months.



Excluding the translation effect of
changes in foreign exchange rates, net sales in the Pacific area increased $1.4 million for the second quarter and $2.4 million for the first six months primarily due to strong activity in the Chinese and Australian markets.



Excluding the translation effect of changes in foreign exchange rates, operating income
increased approximately 35% for the second quarter and 38% for the first six months, primarily due to the increased sales activity, favorable production efficiencies and higher equity earnings from our WAVE joint venture. Operating income also
benefited in the first six months by $1.3 million from recording the effect of the Medicare Act. Partially offsetting these gains were expenses associated with the cost reduction initiative in The Netherlands, increased raw material and energy
costs, wage and salary increases, and employee bonus accruals.



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



Cabinets



|                               |  |      |       |   |      |   |       |                    |  |           |  
|------------------------------ |  | ---- | ----- | - | ---- | - | ----- | ------------------ |  | --------- | -
|                               |  | 2004 |       |   | 2003 |   |       | Change isFavorable | 
|                               |  |     
|Three months ending June 30    |  |      |       |   |      |   |       |                    |  |           |  
|Total Segment Net Sales(1)     |  | $    | 55.1  |   |      | $ | 53.2  |                    |  | 3.6       | %
|Operating Income/(Loss)        |  | $    | 1.5   |   |      | $ | (2.4  | )                  |  | Favorable |  
|Operating Income/(Loss) Margin |  |      | 2.7   | % |      |   | (4.5  | )%                 |  |           |  
|Six months ending June 30      |  |      |       |   |      |   |       |                    |  |           |  
|Total Segment Net Sales(1)     |  | $    | 106.3 |   |      | $ | 105.1 |                    |  | 1.1       | %
|Operating Income/(Loss)        |  | $    | 2.1   |   |      | $ | (6.0  | )                  |  | Favorable |  
|Operating Income/(Loss) Margin |  |      | 2.0   | % |      |   | (5.7  | )%                 |  |           |  



|(1) | All Cabinets products are sold in the Americas, primarily in the U.S.
|--- | ---------------------------------------------------------------------



Net sales in the second quarter and first six months increased
primarily due to the effects of the previously described price increases and sales of higher priced products.



Operating income in the second quarter and first six months improved from the same periods in 2003, due to the increased sales and reduced manufacturing costs, partially offset by higher employee bonus accruals.



All Other



The All Other segment contributed operating income of $0.8 million and $0.5 million in the
second quarters of 2004 and 2003, respectively, and $1.3 million and $0.9 million for the first six months 2004 and 2003, respectively, reflecting the equity in earnings from the investment in Interface Solutions, Inc.



Unallocated Corporate Expense



Unallocated corporate expense of $17.0 million in the second quarter of 2004 decreased from
$81.0 million in 2003. Unallocated corporate expense of $28.9 million in the first six months of 2004 decreased from $98.1 million in 2003. In both the quarter and six months, 2003 expenses included a $73 million non-cash charge related to
managements updated assessment of probable asbestos-related insurance asset recoveries. 2003 also reflected reductions in employee bonus accruals, which included the reversal of $3.5 million accrued in prior periods. In both the quarter and
six months, 2004 expenses included $4.6 million to increase employee bonus accruals and a $3.5 million charge for an environmental matter. Expenses were reduced in the first six months by $0.8 million from recording the effect of the Medicare Act.



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



FINANCIAL CONDITION AND LIQUIDITY



Cash Flow



As shown on the Condensed Consolidated Statements of Cash Flows, our cash and cash equivalents balance increased by $10.0 million in the first six months of 2004,
compared to a $61.1 million decrease in 2003.



Operating activities in the
first six months of 2004 provided $38.7 million of net cash, compared to using $32.6 million in the same period of 2003. Net earnings of $5.1 million in 2004 were $37.5 million higher than the net loss in 2003. While 2004s results included a
$60.0 million non-cash goodwill impairment loss, 2003s results included a $73 million non-cash charge related to managements updated assessment of probable asbestos-related insurance asset recoveries. Accounts payable and accrued
expenses increased by $35.6 million in 2004 and decreased by $23.4 million in 2003, with the year-to-year change primarily due to increased accruals for employee bonuses and increased trade payables.



Net cash used for investing activities was $37.4 million in the first six months of 2004,
compared to $30.8 million in 2003. In 2004, we have not received any distribution from our equity affiliates, while in 2003 we received $7 million. WAVE is evaluating an upcoming debt maturity to ensure they have adequate liquidity before making
additional distributions.



Net cash totaling $9.6 million was provided by our
financing activities in the first six months of 2004, compared to $1.9 million used in the same period of 2003. The year-to-year change was primarily due to certain subsidiaries that are not participating in our Chapter 11 Case increasing their
short-term borrowing in 2004.



Balance
Sheet and Liquidity



Changes in significant balance sheet accounts and
groups of accounts from December 31, 2003 to June 30, 2004 are as follows:



|                                                    |  |              |         |                  |   |          |  |   |      
|--------------------------------------------------- |  | ------------ | ------- | ---------------- | - | -------- |  | - | -----
|                                                    |  | June 30,2004 |         | December 31,2003 |   | Increase
|Cash and cash equivalents                           |  | $            | 494.3   |                  | $ | 484.3    |  | $ | 10.0 
|Current assets, excluding cash and cash equivalents |  |              | 966.2   |                  |   | 874.5    |  |   | 91.7 
|                                                    |  |              |         |                  |   |          |  |   |      
|Current assets                                      |  | $            | 1,460.5 |                  | $ | 1,358.8  |  | $ | 101.7
|                                                    |  |              |         |                  |   |          |  |   |      



The increase in cash and cash
equivalents was described above (see Cash Flow). The increase in current assets, excluding cash and cash equivalents was primarily due to the increase in accounts receivable from higher sales and the increase in inventory, primarily for
Wood Flooring.



|                                                                                       |  |              |         |                  |   |            |  |   |       |  
|-------------------------------------------------------------------------------------- |  | ------------ | ------- | ---------------- | - | ---------- |  | - | ----- | -
|                                                                                       |  | June 30,2004 |         | December 31,2003 |   | (Decrease) | 
|Property, plant and equipment, less accumulated depreciation and amortization (PP&E) |  | $            | 1,224.3 |                  | $ | 1,267.3    |  | $ | (43.0 | )



The decrease was primarily due to
expenditures for PP&E during the first six months of 2004 being less than depreciation and amortization.



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(dollar amounts in millions)



DIP Facility



AWI has a $75 million debtor-in-possession credit facility that currently is limited to issuances of letters of credit. This facility is
scheduled to mature on December 8, 2004. Obligations to reimburse drawings under the letters of credit constitute a super-priority administrative expense claim in the Chapter 11 Case. There were no outstanding borrowings under the DIP Credit
Facility as of June 30, 2004 or December 31, 2003 but, as of June 30, 2004 and December 31, 2003, AWI had $37.3 million and $22.8 million, respectively, in letters of credit outstanding that were issued pursuant to the DIP Credit Facility. The DIP
Credit Facility contains several covenants including, among other things, limits on asset sales and capital expenditures and a required ratio of debt to cash flow. We are in compliance with all of the DIP Facility covenants. The covenants have not
impaired our operating ability. In connection with implementation of the POR, we expect to replace this facility with a new facility that would provide reorganized Armstrong with greater borrowing capacity and which will have debt covenants yet to
be negotiated. In the event the POR has not been implemented before December 8, 2004, we will pursue a third extension of the facility.



Liquidity



Our liquidity needs for operations vary throughout the year. We retain lines of credit to facilitate our seasonal needs, if required. For certain international
operations, we had lines of credit of $49.3 million at June 30, 2004, of which $26.5 million was used and $22.8 million was available. However, these lines of credit are uncommitted, and poor operating results or credit concerns at the related
foreign subsidiaries could result in the lines being withdrawn by the lenders. One credit provider has indicated they wish us to seek alternative financing for a credit line equivalent to approximately $6 million by September 2004. The credit line
is not in violation of any covenants. We believe that working cash requirements can be met utilizing existing credit lines while we seek replacement financing. Additionally, we have letter of credit issuance capabilities under the DIP facility
(described above). We believe that cash on hand and generated from operations, together with lines of credit and the DIP facility, will be adequate to address our foreseeable liquidity needs in the normal course of business operations and for
scheduled non-filer debt obligations. Cash and liquidity needs will change significantly at the time of emergence, the timing of which remains uncertain. AWIs POR provides a plan to meet these requirements (see Note 2).



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##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures and Market Risk
|------- | --------------------------------------------------------



For information regarding our exposure to certain market risks, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in AHIs 2003
Form 10-K filing. There have been no significant changes in our financial instruments or market risk exposures from the amounts and descriptions disclosed therein.



|Item 4. | Controls and Procedures
|------- | -----------------------



(a) Evaluation of Disclosure Controls and Procedures. The Securities and Exchange Commission defines the term disclosure controls and procedures to
mean a companys controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Based on the evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our
chief executive officer and our chief financial officer, as of the end of the period covered by this report, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and
forms.



(b) Changes in Internal Control Over Financial Reporting. No
change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.



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##### Table of Contents

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



See Note 12 of the Condensed Consolidated Financial Statements for a full description of our legal proceedings.



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|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------



|(a) | The following exhibits are filed as part of the Quarterly Report on Form 10-Q:
|--- | ------------------------------------------------------------------------------



|      |     |  |                                                                                                                                                                                                                                                                                                                                                               
|----- | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |     |  | Exhibits                                                                                                                                                                                                                                                                                                                                                      
|      |    
|No. 2 | (a) |  | Armstrong World Industries, Inc.s Fourth Amended Plan of Reorganization submitted to the Bankruptcy Court for the District of Delaware, and as modified by modifications filed with the
Bankruptcy Court on October 17, 2003 and November 10, 2003 is incorporated by reference from the 2003 Annual Report on Form 10-K wherein it appeared as Exhibit 2(a).
|      |    
|No. 2 | (b) |  | Armstrong World Industries, Inc.s Disclosure Statement submitted to the U.S. District Court for the District of Delaware is incorporated by reference from the Current Report filed on
Form 8-K on May 23, 2003.                                                                                                                                             
|      |    
|No. 2 | (c) |  | Certain Exhibits to Armstrong World Industries, Inc.s Fourth Amended Plan of Reorganization submitted to the U.S. District Court for the District of Delaware are incorporated by
reference from the Current Report filed on Form 8-K on September 8, 2003.                                                                                                  
|      |    
|No. 2 | (d) |  | Armstrong World Industries, Inc.s Revised Projected Financial Information submitted to the U.S. Bankruptcy Court for the District of Delaware, constituting Exhibit C to the Disclosure
Statement, is incorporated by reference from the Current Report filed on Form 8-K on November 20, 2003 wherein it appeared as Exhibit 99.1.                          
|      |    
|No. 2 | (e) |  | Armstrong Holdings, Inc. Plan of Dissolution, Winding Up and Distribution is incorporated by reference from Exhibit A to the Proxy Statement of Armstrong Holdings, Inc. filed on October 16,
2003.                                                                                                                                                           
|      |    
|No. 3 | (a) |  | Armstrong Holdings, Inc.s Amended and Restated Articles of Incorporation are incorporated by reference from Exhibit 3.1(i) to Armstrong Holdings, Inc.s Report on Form 8-K dated
May 9, 2000.                                                                                                                                                               
|      |    
|No. 3 | (b) |  | Armstrong Holdings, Inc.s Bylaws, effective May 1, 2000 are incorporated by reference from the 2000 Annual Report on Form 10-K wherein they appear as Exhibit 3(b).                                                                                                                                                                                          
|      |    
|No. 3 | (c) |  | Armstrong World Industries, Inc.s restated Articles of Incorporation, as amended, are incorporated by reference from Armstrong World Industries, Inc.s 1994 Annual Report on Form
10-K wherein they appear as Exhibit 3(b).                                                                                                                                 
|      |    
|No. 3 | (d) |  | Armstrong World Industries, Inc.s Bylaws as amended November 9, 2000 are incorporated by reference from the 2000 Annual Report on Form 10-K wherein they appear as Exhibit
3(d).                                                                                                                                                                             
|      |    
|No. 4 | (a) |  | Armstrong Holdings, Inc.s Shareholder Summary of Rights to Purchase Preferred Stock dated as of March, 14, 2000 is incorporated by reference from Armstrong Holdings, Inc.s
registration statement on Form 8-K dated May 9, 2000, wherein it appeared as Exhibit 99.2.                                                                                      
|      |    
|No. 4 | (b) |  | Armstrong World Industries, Inc.s Retirement Savings and Stock Ownership Plan effective as of October 1, 1996, as amended April 12, 2001 is incorporated by reference from Armstrong
World Industries, Inc.s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, wherein it appeared as Exhibit 4.*                                          



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|      |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----- | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |    
|No. 4 | (c) |  | Armstrong World Industries, Inc.s $450,000,000 Credit Agreement (5-year) dated as of October 29, 1998, among Armstrong World Industries, Inc., The Chase Manhattan Bank, as
administrative agent, and the banks listed therein, is incorporated by reference from Armstrong World Industries, Inc.s 1998 Annual Report on Form 10-K, wherein it appeared as Exhibit 4(f).                                                                                                                                                                                    
|      |    
|No. 4 | (d) |  | Armstrong World Industries, Inc.s Indenture, dated as of August 6, 1996, between Armstrong World Industries, Inc. and The Chase Manhattan Bank, formerly known as Chemical Bank, as
successor to Mellon Bank, N.A., as Trustee, is incorporated by reference from Armstrong World Industries, Inc.s registration statement on Form S-3/A dated August 14, 1996, wherein it appeared as Exhibit 4.1.                                                                                                                                                          
|      |    
|No. 4 | (e) |  | Instrument of Resignation, Appointment and Acceptance dated as of December 1, 2000 among Armstrong World Industries, Inc., The Chase Manhattan Bank and Wells Fargo Bank Minnesota, National
Association, regarding Armstrong World Industries, Inc.s Indenture, dated as of August 6, 1996, between Armstrong World Industries, Inc. and The Chase Manhattan Bank, formerly known as Chemical Bank, as successor to Mellon Bank, N.A., as
Trustee, is incorporated by reference from the 2000 Annual Report on Form 10-K wherein they appear as Exhibit 4(e).
|      |    
|No. 4 | (f) |  | Copy of portions of Armstrong World Industries, Inc.s Board of Directors Pricing Committees resolutions establishing the terms and conditions of $200,000,000 of 6.35% Senior
Notes Due 2003 and $150,000,000 of 6 1/2% Senior Notes Due 2005, is incorporated by reference from Armstrong World Industries, Inc.s 1998 Annual Report on Form 10-K, wherein it appeared as Exhibit 4(h).                                                                                                                                                                   
|      |    
|No. 4 | (g) |  | Copy of portions of Armstrong World Industries, Inc.s Board of Directors Pricing Committees resolutions establishing the terms and conditions of $180,000,000 of 7.45% Senior
Quarterly Interest Bonds Due 2038, is incorporated by reference from Armstrong World Industries, Inc.s 1998 Annual Report on Form 10-K, wherein it appeared as Exhibit 4(i).                                                                                                                                                                                                 
|      |    
|No. 4 | (h) |  | Note Purchase Agreement dated June 19, 1989 for 8.43% Series A Guaranteed Serial ESOP Notes due 1989 2001 and 9.00% Series B Guaranteed Serial ESOP Notes due 2000-2004 for the Armstrong
World Industries, Inc. Employee Stock Ownership Plan (Share in Success Plan) Trust, with Armstrong World Industries, Inc. as guarantor is incorporated by reference from Armstrong Holdings, Inc. and Armstrong World Industries, Inc.s
registration statement on Form 10-Q for the quarter ended September 30, 2000, wherein it appeared as Exhibit 4(a).       
|      |    
|No. 4 | (i) |  | Armstrong World Industries, Inc.s $300,000,000 Revolving Credit and Guarantee Agreement dated December 6, 2000, between Armstrong World Industries, Inc. and The Chase Manhattan Bank and
the banks referenced therein; the First Amendment to this Agreement, dated February 2, 2001; and the Amendment Letter to this Agreement, dated February 28, 2001, are incorporated by reference from the 2000 Annual Report on Form 10-K wherein they
appear as Exhibit 4(i).                                                                                       
|      |    
|      |     |  | Armstrong Holdings, Inc. and Armstrong World Industries, Inc. agree to furnish to the Commission upon request copies of instruments defining the rights of holders of long-term debt of the
registrants and their subsidiaries which are not filed herewith in accordance with applicable rules of the Commission because the total amount of securities authorized thereunder does not exceed 10% of the total assets of the registrants and their
subsidiaries on a consolidated basis.                                                                      



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|       |          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------ | -------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |         
|No. 4  | (j)      |  | Amendment to Armstrong World Industries, Inc.s Debtor in Possession Credit Facility dated October 31, 2003 is incorporated by reference from the 2003 Annual Report on Form 10-K wherein
it appeared as Exhibit 4(j).                                                                                                                                                                                                                                                                                 
|       |         
|No. 4  | (k)      |  | Indenture, dated as of March 15, 1988, between Armstrong World Industries, Inc. and Morgan Guaranty Trust Company of New York, as Trustee, as to which The First National Bank of Chicago is
successor trustee, (relating to Armstrong World Industries, Inc.s $125 million 9-3/4% Debentures due 2008 and Series A Medium Term Notes) is incorporated by reference from Armstrong World Industries, Inc.s 1995 Annual Report on Form 10-K
wherein it appeared as Exhibit 4(c). (SEC File No. 1-2116)
|       |         
|No. 4  | (l)      |  | Senior Indenture dated as of December 23, 1998 between Armstrong World Industries, Inc. and First National Bank of Chicago, as Trustee, is incorporated by reference from Armstrong World
Industries, Inc.s Registration Statement on Form S-3 (File No. 333 - 74501) dated March 16, 1999, wherein it appeared as Exhibit 4.3.                                                                                                                                                                       
|       |         
|No. 4  | (m)      |  | Global Note representing $200 million of 7.45% Senior Notes due 2029 is incorporated by reference from Armstrong World Industries, Inc.s Report on Form 8-K which was filed with the
Commission on May 29, 1999, wherein it appeared as Exhibit 4.2.                                                                                                                                                                                                                                                  
|       |         
|No. 4  | (n)      |  | Agreement and Plan of Merger, dated as of June 30, 1999 by and among AISI Acquisition Corp. and Armstrong World Industries, Inc. and Armstrong Industrial Specialties, Inc. is incorporated by
reference from Armstrong World Industries, Inc.s Report on Form 8-K filed on July 14, 1999, wherein it appeared as Exhibit 1.                                                                                                                                                                          
|       |         
|No. 10 | (i)(a)   |  | Armstrong World Industries, Inc.s Agreement Concerning Asbestos-Related Claims dated June 19, 1985, (the Wellington Agreement) among Armstrong World Industries, Inc. and
other companies is incorporated by reference from Armstrong World Industries, Inc.s 1997 Annual Report on Form 10-K wherein it appeared as Exhibit 10(i)(a). (SEC File No. 1-2116)                                                                                                                                       
|       |         
|No. 10 | (i)(b)   |  | Producer Agreement concerning Center for Claims Resolution, as amended, among Armstrong World Industries, Inc. and other companies is incorporated by reference from Armstrong World
Industries, Inc.s 1999 Annual Report on Form 10-K wherein it appeared as Exhibit 10(i)(b).                                                                                                                                                                                                                       
|       |         
|No. 10 | (iii)(a) |  | Armstrong World Industries, Inc.s Long Term Stock Incentive Plan is incorporated by reference from Armstrong World Industries, Inc.s 1998 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(iii)(j). *                                                                                                                                                                                                                                                                                    
|       |         
|No. 10 | (iii)(b) |  | Armstrong World Industries, Inc.s Directors Retirement Income Plan, as amended, is incorporated by reference from Armstrong World Industries, Inc.s 1996 Annual Report on
Form 10-K wherein it appeared as Exhibit 10(iii)(c).* (SEC File No. 1-2116)                                                                                                                                                                                                                                               
|       |         
|No. 10 | (iii)(c) |  | Armstrong World Industries, Inc. and Armstrong Holdings, Inc.s Management Achievement Plan for Key Executives, as amended February 26, 2001, is incorporated by reference from the 2000
Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(d). *                                                                                                                                                                                                                                       
|       |         
|No. 10 | (iii)(d) |  | Armstrong World Industries, Inc.s Retirement Benefit Equity Plan (formerly known as the Excess Benefit Plan), as amended January 1, 2000, is incorporated by reference from Armstrong
World Industries, Inc.s 1999 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(e).*                                                                                                                                                                                                            



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|       |          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------ | -------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |         
|No. 10 | (iii)(e) |  | Armstrong Holdings, Inc.s Deferred Compensation Plan, as amended May 1, 2000, is incorporated by reference from the 2000 Annual Report on Form 10-K wherein it appeared as Exhibit
10(iii)(f).*                                                                                                                                                                                                                                                                                                                                             
|       |         
|No. 10 | (iii)(f) |  | Armstrong World Industries, Inc.s Employment Protection Plan for Salaried Employees of Armstrong World Industries, Inc., as amended, is incorporated by reference from Armstrong World
Industries, Inc.s 1994 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(g). * (SEC File No. 1-2116)                                                                                                                                                                                                                                
|       |         
|No. 10 | (iii)(g) |  | Armstrong World Industries, Inc.s Restricted Stock Plan For Non-employee Directors, as amended, is incorporated by reference from Armstrong World Industries, Inc.s 1996 Annual
Report on Form 10-K wherein it appeared as Exhibit 10(iii)(h). * (SEC File No. 1-2116)                                                                                                                                                                                                                                                                     
|       |         
|No. 10 | (iii)(h) |  | Armstrong World Industries, Inc.s Severance Pay Plan for Salaried Employees, as amended January 1, 2003, is incorporated by reference from the 2003 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(iii)(h).*                                                                                                                                                                                                                                                                                                                  
|       |         
|No. 10 | (iii)(i) |  | Armstrong World Industries, Inc.s 1999 Long Term Stock Incentive Plan is incorporated by reference from Armstrong World Industries, Inc.s 1999 Annual Report on Form 10-K wherein
it appeared as Exhibit 10(iii)(j).*                                                                                                                                                                                                                                                                                                                      
|       |         
|No. 10 | (iii)(j) |  | Form of Change in Control Agreement between Armstrong World Industries, Inc. and certain of its officers is incorporated herein by reference from the 2000 Annual Report on Form 10-K wherein
they appear as Exhibit 10(iii)(k), together with a schedule identifying those executives and the material differences among the agreements to which each executive is a party is incorporated by reference from the 2003 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(iii)(j). *                                               
|       |         
|No. 10 | (iii)(k) |  | Change in Control Agreement between Armstrong Holdings, Inc. and Michael D. Lockhart, dated August 7, 2000 is incorporated by reference from Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, wherein it appeared as Exhibit 10(e). *                                                                                                                                                                                                                 
|       |         
|No. 10 | (iii)(l) |  | Form of Indemnification Agreement between Armstrong Holdings, Inc., Armstrong World Industries, Inc. and Messrs. Arnelle, Campbell, Krol, Marley, Stead and Ms. Owades, is incorporated by
reference from Armstrong Holdings, Inc. and Armstrong World Industries, Inc.s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, wherein it appeared as Exhibit 10(iii)(a). *                                                                                                                                                    
|       |         
|No. 10 | (iii)(m) |  | Form of Indemnification Agreement between Armstrong Holdings, Inc. and certain of its Directors and Officers dated October 20, 2000 is incorporated by reference from the 2000 Annual Report on
Form 10-K wherein they appear as Exhibit 10(iii)(o), together with a schedule identifying those Directors and Officers and the material differences among the agreements to which each executive is a party is incorporated by reference from the 2003
Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(m).*                
|       |         
|No. 10 | (iii)(n) |  | Form of Indemnification Agreement between Armstrong World Industries, Inc. and certain of its Directors and Officers is incorporated herein by reference from the 2000 Annual Report on Form
10-K wherein they appear as Exhibit 10(iii)(p), together with a schedule dated October 20, 2000, identifying those Directors and Officers and the material differences among the agreements to which each executive is a party is incorporated by
reference from the 2003 Annual Report on From 10-K where it appeared as Exhibit 10 (iii)(n). *



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|       |          |  |                                                                                                                                                                                                                                                                                                                                           
|------ | -------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |         
|No. 10 | (iii)(o) |  | Form of Indemnification Agreement between Armstrong Holdings, Inc. and M. Edward Sellers, dated May 1, 2001 is incorporated herein by reference from the 2001 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(iii)(s).*                                                                                                      
|       |         
|No. 10 | (iii)(p) |  | Form of Indemnification Agreement between Armstrong World Industries, Inc. and Leonard A. Campanaro, David E. Gordon and Barry M. Sullivan, is incorporated by reference from Armstrong World
Industries, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, wherein it appeared as Exhibit 10.*              
|       |         
|No. 10 | (iii)(q) |  | Form of Indemnification Agreement between Armstrong Holdings, Inc. and Armstrong World Industries, Inc. and Ms. Ruth M. Owades and Mr. John J. Roberts is incorporated by reference from the
2003 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(q).*                                                                  
|       |         
|No. 10 | (iii)(r) |  | Armstrong World Industries, Inc.s Bonus Replacement Retirement Plan, dated as of January 1, 1998, as amended, is incorporated by reference from Armstrong World Industries, Inc.s
1998 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(m). *                                                                          
|       |         
|No. 10 | (iii)(s) |  | Employment Agreement between Armstrong Holdings, Inc. and Michael D. Lockhart dated August 7, 2000 is incorporated by reference from Armstrong Holdings, Inc. and Armstrong World Industries,
Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 wherein it appeared as Exhibit 10(a). *                       
|       |         
|No. 10 | (iii)(t) |  | Amendment to August 7, 2000 Employment Agreement between Armstrong Holdings, Inc. and Michael D. Lockhart is incorporated by reference from Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, wherein it appeared as Exhibit 10. *                      
|       |         
|No. 10 | (iii)(u) |  | Order Authorizing and Approving Retention Program for Key Employees and Approving Assumption of Executory Contracts dated April 18, 2001 is incorporated by reference from the 2001 Annual
Report of Form 10-K wherein it appeared as Exhibit 10(iii)(u).                                                                                 
|       |         
|No. 10 | (iii)(v) |  | Armstrong Holdings, Inc.s Stock Award Plan is incorporated by reference from Armstrong Holdings, Inc.s registration statement on Form S-8 filed August 16, 2000, wherein it
appeared as Exhibit 4.1. *                                                                                                                                  
|       |         
|No. 10 | (iii)(w) |  | Terms of Restricted Stock for Stock Option Exchange Program Offered to Employees and Schedule of Participating Officers is incorporated by reference from Armstrong Holdings, Inc. and
Armstrong World Industries, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 wherein it appeared as Exhibit 10(i). *  
|       |         
|No. 10 | (iii)(x) |  | Management Services Agreement between Armstrong Holdings, Inc. and Armstrong World Industries, Inc., dated August 7, 2000 is incorporated by reference from Armstrong Holdings, Inc. and
Armstrong World Industries, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 wherein it appeared as Exhibit 10(g). *
|       |         
|No. 10 | (iii)(y) |  | Agreement between Armstrong Holdings, Inc. and Armstrong World Industries, Inc. and Triangle Pacific Corp. dated November 14, 2000 is incorporated by reference from the 2000 Annual Report on
Form 10-K wherein they appear as Exhibit 10(iii)(bb). *                                                                                    
|       |         
|No. 10 | (iii)(z) |  | Form of Amendment of Restricted Stock Award Agreements between AHI and the following executive officers: M.D. Lockhart, M.J. Angello, S.J. Senkowski and W.C. Rodruan dated July 22, 2002 is
incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 wherein it appeared as Exhibit 10.          



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|                |  |                                                                                                                                                                                                                                                                       
|--------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                | 
|No. 10(iii)(aa) |  | Settlement and Release Agreement between Armstrong Holdings, Inc., Armstrong Worldwide, Inc. and Armstrong World Industries, Inc. dated May 9, 2003 is incorporated by reference from the 2003
Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(aa).*
|                | 
|No. 14          |  | The Code of Business Conduct and the Code of Ethics for Financial Professionals are available through Armstrongs internet web site at www.armstrong.com.                                                                                                             
|                | 
|No. 15          |  | Awareness Letter from Independent Registered Public Accounting Firm.                                                                                                                                                                                                  
|                | 
|No. 31.1        |  | Certification of Principal Executive Officer of Armstrong Holdings, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                           
|                | 
|No. 31.2        |  | Certification of Principal Financial Officer of Armstrong Holdings, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                           
|                | 
|No. 31.3        |  | Certification of Principal Executive Officer of Armstrong World Industries, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                   
|                | 
|No. 31.4        |  | Certification of Principal Financial Officer of Armstrong World Industries, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                   
|                | 
|No. 32.1        |  | Certification of Chief Executive Officer of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                   
|                | 
|No. 32.2        |  | Certification of Chief Financial Officer of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                   



|* | Compensatory Plan or Management Contract
|- | ----------------------------------------



|(b) | The following Current Reports were filed on Form 8-K since the first quarter of 2004.
|--- | -------------------------------------------------------------------------------------



| | 1) | On April 29, 2004, a Current Report was filed under Items 5 and 12 of Form 8-K related to Steve Senkowskis election to the additional posts of Executive Vice President of both
Armstrong Holdings, Inc. and Armstrong World Industries, Inc. and a press release of the same date regarding financial results for fiscal quarter ended March 31, 2004.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Armstrong Holdings, Inc. Armstrong World Industries, Inc.By:

/s/ Leonard A. CampanaroLeonard A. Campanaro, Senior Vice President and Chief Financial OfficerBy:

/s/ John N. RigasJohn N. Rigas, Senior Vice President, Secretary and General CounselBy:

/s/ William C. RodruanWilliam C. Rodruan, Vice President and Controller (Principal Accounting Officer)




Date: July 29, 2004



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                    
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                    
|            | 
|No. 15      |  | Awareness Letter from Independent Registered Public Accounting Firm.                                                                                                                                               
|            | 
|No. 31.1    |  | Certification of Principal Executive Officer of Armstrong Holdings, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.        
|            | 
|No. 31.2    |  | Certification of Principal Financial Officer of Armstrong Holdings, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.        
|            | 
|No. 31.3    |  | Certification of Principal Executive Officer of Armstrong World Industries, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|            | 
|No. 31.4    |  | Certification of Principal Financial Officer of Armstrong World Industries, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|            | 
|No. 32.1    |  | Certification of Chief Executive Officer of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|            | 
|No. 32.2    |  | Certification of Chief Financial Officer of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.